XOM Exxon Mobil Corp

MELBOURNE, Australia—Santos Ltd. rejected as too low a 7.14 billion Australian dollar (US$5.15 billion) takeover offer from a private-equity firm backed by sovereign investors and wealthy members of Asian and Gulf-based ruling families.

Bermuda-based Scepter Partners made the nonbinding cash offer on Tuesday, Santos said. It said the A$6.88-a-share bid was "opportunistic" and undervalued its assets, which include its flagship Gladstone gas-export project on Australia's east coast, shared with Total SA, and a stake in an Exxon Mobil Corp.-led gas development in Papua New Guinea.

According to Santos, Scepter's offer also comes with conditions that could work against other options it is considering in a sweeping strategic review launched in August. Santos's shares jumped as much as 21% after the bid was disclosed on Thursday.

Scepter's offer represents a 30% premium to the price of Santos shares at Tuesday's close. It is also the latest stab at a high-stakes merger or acquisition in the energy sector, following a slump in oil prices and since Royal Dutch Shell PLC agreed to buy BG Group PLC in April for US$70 billion. Last month, Sydney-listed Oil Search Ltd. rebuffed an offer from larger Woodside Petroleum Ltd. that valued it at A$11.6 billion.

Potential suitors have been circling Santos since the start of its operational review, aimed at restoring investor confidence and repairing a balance sheet stretched by heavy investment in energy projects from Australia's Queensland state to Papua New Guinea. A spokeswoman said all options—which Santos has previously said may include a capital raising—were still being assessed. Scepter couldn't immediately be reached for comment.

Santos is among several companies that bet big on feeding Asia with natural gas, anticipating continued growth in developing nations' need for energy and for cleaner-burning fuels. In Australia alone, more than US$200 billion has been invested in recent years on vast liquefied-natural-gas, or LNG, developments that have positioned the country to more than triple exports over the next five years.

Neil Beveridge, a senior analyst at Sanford C. Bernstein in Hong Kong, said it was notable that a bid had been made by a private-equity firm. Santos has a range of assets, including some lower-quality and smaller investments, that may be less attractive to a bigger energy company than to an investor seeking to restructure its debt and break the company up, he said. "Still, this shows they [Santos] are trying to get better prices for assets," Mr. Beveridge said.

According to its website, Scepter has more than US$14 billion in discretionary assets, with a focus on natural resources, infrastructure, real estate, media and telecommunications. Scepter's directors include Prince Abdul Ali Yil Kabier and Prince Bahar Bolkiah, both members of Brunei's ruling family, while its chief executive is financier Rayo Withanage, who trained as an M&A lawyer before moving into investing.

Adelaide-based Santos opened the door to offers for its assets in August when it brought on board Deutsche Bank and Lazard to advise on options for dealing both with its sunken share price and earlier approaches it said it had received. At the time, its long-serving chief executive, David Knox, said he would step down once a successor had been named.

Santos's flagship US$18.5 billion Gladstone LNG project, being developed in Queensland state with Total, shipped its first cargo of gas this month. Along with smaller operations, it also has a minority stake in the US$19 billion Exxon Mobil Corp.-led gas development in Papua New Guinea, which began exporting gas last year.

The low-cost PNG LNG project, which also counts Oil Search as an owner, is viewed by analysts as the crown jewel in Santos's portfolio that it could be reluctant to let go of, even if a sale could go a long way to reducing debt that had swollen to A$8.79 billion by the end of June.

Last month, Oil Search rejected an all-stock offer from Woodside, which had sought to build a regional oil-and-gas champion by adding the Papua New Guinea-focused energy company. Based on that bid, analysts have estimated that Santos's stake in the PNG LNG project could be worth about A$5 billion or more, although it also accounts for a large chunk of the company's cash flow.

Write to Robb M. Stewart at robb.stewart@wsj.com

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October 22, 2015 01:05 ET (05:05 GMT)

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