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Energy M&A has become a game of musical chairs, analyst says

Diamondback Energy (FANG) will acquire Endeavor Energy Resources in a deal valued at $26 billion, just the latest instance of M&A activity in the energy space.

TD Cowen Senior Analyst David Deckelbaum lists all the advantages Diamondback has to gain from this merger, including strengthening its hold on the Permian Basin.

"You're practically buying the same sort of acres that you have now, so you really have no degradation performance, valuation was very reasonable, and now you just really scaled to now be the third-largest producer in the Permian Basin," Deckelbaum tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

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Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

- Diamondback energy merging with Endeavor energy resources. That deal valued at nearly $26 billion. Shares of Diamondback are jumping on that news. It's the latest and of course, a string of M&A activity in the energy sector. Joining us now is David Deckelbaum, TD Cowen, Senior Analyst. David, it is great to have out of the show and you are just the man to talk to about this headline David.

So listen, first of all, just get your general take David. You've had time to look at this news. Does it make sense to you David financially and strategically. Certainly investors, they like it David. I look at Diamondback energy, it's here about 9% in today's trade.

DAVID DECKELBAUM: Yeah, now that's a great point and thanks for having me. Diamondback up 9% today. Obviously, investors like it. But if you were looking for a perfect deal, this is really it. Just at a very high level, you're checking all of the boxes. They're increasing their production by almost 70%. They're increasing number of locations by over 60%.

The wells that they can drill over time. And this is a company that's right in their backyard. So there's so many logical synergies there. But you're practically buying the same acreage that you have now. So you really have no degradation performance. Valuation was very reasonable. And now you've just really scaled to now be the third largest producer in the Permian Basin.

- David, it has been just crazy, the amount of deals and the size of the deals that we've been seeing for new shale or not new shale. But to buy new to these companies shale, there's the list of the deals. Again, on a high level, what is driving this sudden surge of activity?

DAVID DECKELBAUM: Yeah. I mean, I really think there's probably two big things. One is that the market becomes fast followers generally speaking. I think once the music starts, you start worrying about the music stopping and not having a chair to sit down on. But I think this really gets back to. Beginning in 2018, all of this energy complex was pushed by investors to start returning capital to shareholders, which means no one's growing production anymore.

Everyone's just cutting costs, reducing capital spending and then giving that excess free cash back to shareholders. In the first several years, we saw massive out-performance in the energy index. In 2022, 2023, it underperformed and I think a lot of this now gets to the point of if you've already initiated this huge dividend and variable buyback and variable dividend program, this return on capital program.

Without growth, how do you create value? You create value through M&A.