(Bloomberg) -- Woodside Energy Group Ltd.’s hopes of a tie-up with Santos Ltd. to create Asia’s dominant liquefied natural gas exporter face a potential hurdle over the valuation of a target whose shares recently fell to an eight-month low.

The companies met this week and discussed an initial outline of a proposal that would see Woodside’s Chief Executive Officer Meg O’Neill lead a combined group with gas and oil assets spanning Alaska to Australia, according to people familiar with the talks, who requested anonymity as the details are private.

Woodside’s assessment of Santos is likely to reflect the low premiums involved in a recent wave of oil and gas mega-deals, one of the people said. That’s unlikely to be acceptable to the Adelaide-based producer’s investors or board, which regard Santos as undervalued, according to some of the people.

Woodside will need to “be willing to recognize and pay up for that value — which represents the biggest risk to a merger proceeding in our view,” Tom Allen, an analyst at UBS Group AG, said in a note.

Read More: Woodside Would Become Pacific LNG Giant If It Seals Santos Deal

The two companies confirmed late Thursday they have had early-stage discussions on a possible transaction, while Santos said it’s also reviewing other alternatives. They have a combined market capitalization of about A$80 billion ($53 billion), with Perth-based Woodside accounting for almost three-quarters of that. 

Santos didn’t immediately respond Friday to a request to comment on specific details of the talks. A Woodside spokeswoman declined to comment.

Both companies have seen their shares fall in recent months. “We are all very frustrated with how undervalued we are,” Santos CEO Kevin Gallagher told investors last month. 

An average 12-month price target for Santos of A$8.93 among analyst forecasts compiled by Bloomberg is 31% higher than the company’s close on Thursday.  

Santos closed 6.2% higher in Sydney trading Friday, after rising as much as 11% earlier, while Woodside declined 0.5%, indicating investors view a deal as still distant.

By adding Santos, Woodside would create a regional energy champion in Asia with more than 70% of its product mix in gas or LNG, right on the doorstep of the industry’s most important growth markets, according to UBS’s Allen. 

“The LNG assets that this combined company would have would be the envy of most of the E&Ps around the world,” he said. Forecast 2024 output would rank the new entity among the world’s 10 largest exploration and production companies by volume, UBS calculated.

Agreeing on a deal is likely prove difficult and synergies are expected to be small, potentially around $200 million to $400 million, because there’s limited asset overlap, Evans and Partners Pty Ltd. analysts including Adam Martin said in a note. 

TotalEnergies SE, BP Plc and ConocoPhillips could all be potential alternative buyers of Santos, Martin said.

Santos rejected a $10.9 billion takeover proposal from Harbour Energy Ltd. in 2018 as too low, and later acquired Papua New Guinea-focused Oil Search Ltd. in a $15 billion deal agreed in 2021. 

Woodside’s O’Neill has pursued an aggressive growth strategy to match the producer’s bullish outlook on long-term fuel demand in Asia. The former Exxon Mobil Corp. executive last year completed a transaction worth about $20 billion to add BHP Group Ltd.’s oil and gas division, and is advancing a slate of expansions including the $12 billion Scarborough LNG development in Australia.

Santos holds assets including a stake in an LNG export project in PNG and has natural gas production in Australia, which could see any tie-up scrutinized by local regulators. 

“Both Santos and Woodside are material domestic gas producers, which may create market concentration concerns,” RBC Capital Markets analyst Gordon Ramsay said in a note.

(Updates with details, share prices from first paragraph.)

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