UPDATE 15/09: The Oil Search executive board has unanimously rejected Woodside’s proposal, saying it was “highly opportunistic and grossly undervalues the company”.

Woodside said it regretted the rejection.

“Woodside is surprised and disappointed that the board of Oil Search has rejected the proposal without meeting with Woodside to understand the benefits of the opportunity or to negotiate the terms of a possible merger,” the company said in a statement to the ASX.

ORIGINAL: Woodside Petroleum - Australia's biggest oil and gas producer - is looking to buy another leading industry player.

Woodside has made an $11.6 billion bid for Oil Search, one of its main rivals.

The company’s statement to the ASX said it would offer one of its shares for every four shares in Oil Search.

Oil Search had a market capitalisation of $10.24 billion before the offer, representing a near 13 per cent premium on Oil Search's pre-bid price.

Oil Search has responded to the bid, saying it “intends to review the proposal and will update the market in due course”.

It is expected that any deal would carry conditions such as continued support of the PNG government – a joint stakeholder in the PNG LNG project.

It is regarded as one of the lowest-cost new LNG developments in the world, and Oil Search holds a 29 per cent stake.

It has been a rough year for the PNG-focussed firm, amid market shakiness for almost all in the traditional energy game.

Oil Search's share price is down almost 30 per cent for the past 12 months, spared from an even bigger hit by its PNG production coming online late last year.

Analysts at Goldman Sachs rate Oil Search stock as a “buy”, and the company is generally regarded as being in a comfortable position to control debt while maintaining dividends, even with oil prices as low as $US40 a barrel.

Woodside has been looking to buy “growth” in the tumbling oil and gas market.

It has the money, due to strong cash flow from its existing oil and gas fields.

But Oil Search says it has new development opportunities, low-cost operating assets, significant discovered reserves and extensive exploration acreages, putting it in a good position to capitalise if the oil price recovers.

“Clearly Oil Search shareholders are entitled to an offer which adequately reflects this value potential,” the company said in a statement to the ASX.

Woodside says it is still early days for the potentially massive deal, and “there is no certainty that these discussions will result in a transaction”.

But “the proposal is consistent with Woodside's strategy of delivering superior shareholder returns by maximising the value of our core assets, leveraging our capabilities and growing our portfolio,” Woodside said.