[Editor's note: This story was updated at 6:55 a.m. CST March 28. Check back for additional updates on this developing story.]

In a deal set to establish a new Permian powerhouse, Concho Resources Inc. (NYSE: CXO) said March 28 it will acquire RSP Permian Inc. (NYSE: RSPP) for $9.5 billion, including RSP's net debt.

The all-stock merger of the two Permian-focused E&Ps is expected to create the largest unconventional shale producer of oil and natural gas in the prolific basin, the companies said in a joint press release.

The addition of RSP’s roughly 92,000 net acres will expand Concho's existing acreage position in the Permian Basin to more than 640,000 net acres. The deal is the largest since the 2011 acquisition of Petrohawk Energy Corp. by BHP Billiton Ltd. (NYSE: BHP) in a transaction totaling $12.1 billion.

Concho And RSP Permian's Combined Position

The combined company, to be headquartered in Midland, Texas, is expected to run the largest drilling program in the Permian with 27 rigs.

“This combination allows us to consolidate premier assets that seamlessly fold into our drilling program, enhance our scale advantage and reinforce our leadership position in the Permian Basin, all while strengthening our platform for delivering predictable growth and returns,” Tim Leach, chairman and CEO of Concho, said in a statement.

The companies also anticipate a present value of corporate and operational synergies of more than $2 billion from the combination.

In the Permian, the deal is the largest merger of two public companies since Noble Energy Inc. (NYSE: NBL) acquired Clayton Williams Energy Inc. for $3.2 billion in April 2017. However, that transaction did not lead to broader consolidation efforts at the time.

But so far this year, Seaport Global Securities said in a March 28 report that corporate M&A has been a “hot topic in our conversations with both investors and industry.” The merger of Concho and RSP may take the conversation to a different level.

“Our initial take is that we see the deal making sense for both parties,” the firm said. “We frankly thought Concho traded at too lofty of a valuation multiple at 11.3x its 2018 EV/EBITDA” compared to the average Permian pure play at 7.7x.

“It makes sense for the company to yield its currency as a means to acquire a top-shelf Permian producer such as RSPP,” Seaport said. “Folding RSPP into the Concho portfolio will increase the average project return for the company as we believe RSPP’s Delaware position sits in the epicenter of the play and will likely provide some of the best project returns across the Permian.”

Steve Gray, CEO of RSP, said in a statement: “I am extremely proud of the RSP team and the high-quality position we built in the Permian Basin. As RSP has grown and we have seen the resource play develop in the Permian, we have come to recognize that combining with a company with the scale, investment grade balance sheet and operational excellence of Concho will unlock even more value for shareholders. The combined company will have the vision and necessary financial strength to efficiently develop the tremendous resource potential of these assets with large-scale projects.”

In fourth-quarter 2017, production on RSP’s assets totaled roughly 55.5 thousand barrels of oil equivalent per day (boe/d) on a two-stream basis, of which about 80% was crude oil and 20% was natural gas. The transaction adds 2.2 billion boe of resource potential, of which more than two-thirds is premium resource.

Under the terms of the definitive merger agreement, shareholders of RSP will receive 0.320 shares of Concho common stock in exchange for each share of RSP common stock, representing consideration to each RSP shareholder of $50.24 per share based on the closing price of Concho common stock on March 27.

The consideration represents a roughly 29% premium to RSP’s closing price of $38.92 on March 27, according to the companies’ joint press release.

Upon closing of the transaction, which the companies expect in third-quarter 2018, Concho shareholders will own about 74.5% of the combined company, and RSP shareholders will own 25.5%. In addition, Concho’s board will be expanded to 11 directors, to include one independent member of the RSP board.

The transaction is subject to the approval of both Concho and RSP shareholders, the satisfaction of certain regulatory approvals and other customary closing conditions.

Morgan Stanley & Co. LLC was exclusive financial adviser to Concho and Sullivan & Cromwell LLP and Gibson, Dunn & Crutcher LLP were its legal advisers. Tudor, Pickering, Holt & Co. was exclusive financial adviser to RSP and Vinson & Elkins LLP was its legal adviser.

Emily Patsy can be reached at epatsy@hartenergy.com.