By David Winning

SYDNEY--Santos Ltd. rode a recovery in energy prices to report a US$354 million half-year profit, as it seeks to advance a proposal to combine with Oil Search Ltd. and create a 22 billion Australian dollar (US$16.2 billion) company.

Santos said its net profit had recovered from a US$289 million loss at the corresponding period of 2020 when it absorbed a large impairment charge against assets including the GLNG gas-export project.

Directors of the company declared an interim dividend of 5.5 U.S. cents a share, higher than the payout of 2.1 U.S. cents a year earlier.

Santos's pursuit of Oil Search represents a doubling down on production of oil and natural gas even as some rivals seek to transition away from fossil fuels. Santos is also investing in several projects across Australia, including construction of the US$3.5 billion Barossa natural gas project and early engineering and design work on the Dorado oil and gas field.

Santos this month improved the terms of its takeover proposal after an earlier approach was knocked back by Oil Search as too low.

Santos is now offering 0.6275 of its own shares in exchange for each Oil Search share. A deal would lead to Santos shareholders owning 61.5% of the combined company, with Oil Search investors holding the remaining stock.

Oil Search said there was strategic logic in combining the companies' assets and said it intends to recommend the offer, assuming Santos completes due diligence satisfactorily.

Santos hasn't detailed how many savings it expects from the merger, with analysts speculating it could range from US$60 million to US$150 million a year, such as by reducing corporate costs where they overlap. Santos and Oil Search are both shareholders in the PNG LNG gas-export facility in Papua New Guinea.

Speculation that Oil Search could become a takeover target intensified after Mubadala Investment Co., an investment arm of the Abu Dhabi government, sold an around 4.5% stake in the company as part of a broader effort by the emirate to reduce its reliance on the oil sector. Mubadala still owns 4.9% of Oil Search.

Santos's growth ambitions are being supported by crude oil and natural gas prices sharply rebounding from lows reached early in the pandemic last year. Brent crude--the global oil-price benchmark--is up 34% year-to-date and settled Monday at US$69.51 a barrel.

Last month, Santos said sales revenue totalled US$1.08 billion in the three months through June, despite production falling 9% compared to the previous quarter, mainly due to the sale of a 25% stake in the Bayu-Undan gas field and Darwin LNG project to South Korea's SK E&S at the end of April. Half-year revenue rose 22% to US$2.04 billion.

Santos expects to produce 87 million-91 million barrels of oil equivalent this year, with sales volumes of between 100 million and 105 million BOE.

Write to David Winning at david.winning@wsj.com

(END) Dow Jones Newswires

08-16-21 1854ET