What happened

Shares of RSP Permian Inc. (NYSE:RSPP) were flying higher on Wednesday, up nearly 20% at 9:45 a.m. EDT. Fueling the rally was the announcement that the Permian Basin-focused driller has agreed to an all-stock merger with Concho Resources (NYSE:CXO), which declined more than 8% on the news.

So what

Concho Resources has agreed to acquire RSP Permian in a transaction valuing it at $9.5 billion, including the assumption of debt. Current holders of RSP Permian will receive 0.32 shares of Concho's common stock when the deal closes, which the companies anticipate happening in the third quarter. That equates to about $50.24 per share, about a 29% premium to yesterday's closing price.

An oil pump with stacks of $100 bills in the back ground.

Image source: Getty Images.

The transaction will create the largest unconventional shale producer in the Permian Basin. It combines two large, highly complementary acreage positions to form a leading Permian pure-play company. Concho expects the combination to yield $60 million in annual corporate cost savings and upward of $2 billion in operational synergy opportunities in the future as the combined companies optimize their development plans. The transaction will also bolster Concho's per-share metrics for net asset value, earnings, cash flow, and debt-adjusted production growth in the first year, while also enhancing its three-year production growth outlook.

Now what

Concho Resources has been an active acquirer in recent years, gobbling up land in the Permian to build a premier large-scale producer. This transaction with RSP Permian furthers that aim, transforming the company into a regional powerhouse. However, the company is paying a hefty premium for RSP Permian, which will only pay off if oil keeps improving and it captures a bulk of the anticipated deal synergies. Those factors increase the risk that the stock of the combined companies could underperform rivals from here, especially since an increasing number of shale drillers are more focused on growing shareholder returns than their overall size.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.