When it comes to onshore drilling for oil and especially natural gas, directional is the new vertical.
Now that the industry is targeting shale plays like the natural gas-bearing Marcellus and the oil-bearing Bakken, players such as Devon Energy (NYSE: DVN ) , Chespeake Energy (NYSE: CHK ) , and XTO Energy (NYSE: XTO ) all have to send their drillbits sideways to hit more "pay."
This is a major boon for drillers like Precision Drilling Trust (NYSE: PDS ) , whose rigs are able to perform this more demanding directional activity. Another beneficiary of the trend is W-H Energy Services (NYSE: WHQ ) , whose PathFinder subsidiary provides both the personnel and the equipment to hit those hard-to-reach reservoirs.
No wonder, then, that W-H is the latest acquisition target in an increasingly busy M&A season. Smith International (NYSE: SII ) is buying the company for about $3.2 billion in cash and shares. Smith is one of the global heavyweights in drilling services, and as directional drilling becomes more common worldwide, W-H will prove to be a valuable asset.
This is now the third drilling services company to be snapped up in recent months. While I wouldn't bet on too much additional consolidation, the drillers are very well-positioned given today's oil and natural gas prices -- not to mention the upward-sloping futures curve and the recent start of hurricane season. The purest play on horizontal drilling that I know of is Helmerich & Payne (NYSE: HP ) , which is a fine place to begin your investigation of the space.