Australia’s Santos on May 22 ended talks with Harbour Energy and rejected the U.S.-based firm’s $10.8 billion takeover offer, saying it undervalued the oil and gas producer as oil prices surge.

The decision shocked analysts and leaves Harbour, which had tabled an increased and final offer this week, sorely disappointed, after increasing its proposed bid five times in nine months following a steep rise in global crude oil prices.

“[The board] resolved to reject the final proposal on the basis that it does not represent a full value of the company and, when combined with the associated risks, is not in the best interests of Santos shareholders,” Santos said.

Santos said both Brent oil and the share prices of its Australian Securities Exchange-listed energy peers had risen since Harbour made an indicative proposal on April 3.

Harbour, which had already secured the support of large shareholders ENN Ecological Holdings and Hony Capital, said it was disappointed in Santos’s decision to reject a fully funded offer with a “compelling” premium, adding there was insufficient engagement from its board.

“There was ... no meaningful attempt by Santos to discuss a realistic price which could be supported by any reasonable set of technical and commercial assumptions,” Harbour said in an emailed statement, where it added that it remained open to engage constructively with the board.

“Harbour remains of the view that all shareholders should be afforded the opportunity to decide for themselves on the merits of our offer,” it said, without saying whether it would consider a hostile bid.

A source close to Harbour said a hostile approach was unlikely. The source spoke on condition of anonymity due to the sensitivity of the issue.

A 'Shock' Rejection

Shares in the oil and gas producer had risen on the back of the sweetened proposals to AU$6.40 (US$4.86) per share, giving the company a market value of AU$13.4 billion (US$10.17 billion) - that was still below the offer price amid uncertainty over whether the deal would go ahead.

Oil prices have risen about 17% since Santos received Harbour’s initial $4.98 per share offer in April.

Santos, a recently revived company with a low cost of gas production and stakes in LNG in the Asia-Pacific, where demand is soaring, said its own strategy could achieve “superior” value.

“Santos has had regard to ... the superior value for shareholders that the Santos Board believes could be realized through the execution of Santos’ existing strategy, capitalizing on its strong free cash flows, sustainable low cost operating model and significant growth opportunities,” the company said in the statement.

RBC Capital markets said the rejection was a surprise, and put the board and executive team under pressure to demonstrate it can deliver value to shareholders.

“The rejection is a shock to us as we saw the bid price as very much full,” RBC analysts wrote in a note to clients.

“The onus is now firmly on the board and executive to execute strategy, grow the company and hope that oil, gas and LNG prices do not retreat materially,” they added.

Citing other drawbacks to the offer, Santos said Harbour’s final bid was highly leveraged on private equity, and that Santos would have to provide fundraising support to Harbour and hedge a large part of its oil-linked production.

The deal had also been subject to approval by Australia’s foreign investment regulator.