What happened

Shares of Parsley Energy (NYSE:PE) sold off more than 11% by 10:30 a.m. EDT on Monday. Weighing on the energy company's stock price was the announcement that it would acquire fellow Permian Basin-focused producer Jagged Peak Energy (NYSE:JAG).

So what

Parsley Energy has agreed to buy Jagged Peak Energy in an all-stock deal valuing the company at $2.27 billion, including the assumption of $625 million of net debt. The deal price implied a premium of 11.2% to Jagged Peak's closing price on Friday, though it's only about 1.5% above its average over the last 30 trading days. Parsley Energy investors will own 77% of the combined company once the transaction closes, which the companies anticipate will happen in the first quarter of next year.

The silhouette of two people shaking hands with oil pumps in the background.

Image source: Getty Images.

The merger will do several things for Parsley Energy. First, it will enhance the company's footprint in the Delaware Basin side of the Permian. Given that the majority of Jagged Peak's land in that region is near Parsley's position, it's a very complementary acquisition. Second, the transaction will be immediately accretive to the company's key financial metrics in 2020, including cash flow per share and net asset value. Finally, the deal will help reduce the combined company's costs. Parsley expects to save $25 million on general and administrative expenses in the first year and $40 million to $50 million of annual savings after that. Meanwhile, the company has identified additional savings that it could realize over time, including utilizing Jagged Peak's water infrastructure.

Now what

While the merger with Jagged Peak Energy makes strategic sense, investors have soured on oil company M&A due to the sector's struggles with creating value through mergers. Because of that, Parsley Energy needs to deliver on the cost savings of this deal to prove to investors that it's not empire building but making moves that enhance shareholder value.