Shares of Marathon Oil (MRO) rallied 10.4% though Thursday trading, according to data from S&P Global Market Intelligence.

The rally was due to the merger agreement that was struck on Wednesday with oil and gas giant ConocoPhillips (COP 0.03%), which agreed to acquire Marathon for an enterprise value of $22.5 billion.

An all-stock deal with plenty of synergies and cash flow

Marathon shareholders will receive 0.255 shares of ConocoPhillips per Marathon share, amounting to a 16% premium, given the two companies' share prices before the announcement. But as ConocoPhillips' stock fell a bit in the aftermath of the news, Marathon ended the week slightly lower than the premium as it will soon be combined with Conoco.

The tie-up does seem to make good financial and operational sense, as Marathon has land right next to Conoco's in the Eagle Ford and Delaware Basins in Texas, as well as the Bakken in North Dakota. As a result of the complementary assets, Conoco forecasts about $500 million in cost synergies. And the combined company will now have the second highest number of drilling locations in the lower 48 states of any company. The combined company will then have 60% of production coming from the continental U.S., with the remaining 40% in Alaskan and international assets.

But the deal should be accretive to Conoco's shareholders right away. After all, Marathon's P/E ratio spiked this week and Conoco's declined in the wake of the deal news. But as of Thursday, Conoco still has a P/E ratio of 13.1 versus Marathon's 11.8. So, Conoco is using its higher-priced stock to buy a lower-priced assets, even with the deal premium.

As a result, Conoco announced a 34% increase in its base dividend and a $2 billion increase to its share buyback outlook, raising it to over $7 billion this year.

A solid consolidation

The oil and gas industry has been consolidating recently, with ExxonMobil buying Pioneer Natural Resources and Chevron buying Hess. Now, it was ConocoPhillips' turn to buy Marathon.

All of these giants have typically traded at premium multiples to their pure upstream acquirees, so the resulting mergers have been accretive as they swap more expensive stock for cheaper stock while acquiring complementary assets. In return, the acquirees will acquire stock in larger, more diversified traditional energy companies, which have the resources to perhaps better optimize operations and navigate the energy transition.