A New Direction in Energy M&A

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.

Related Foolishness:

• Here's the first driller deal, and here's the second one. (I was pleased with neither).
• Here's an enticing E&P that's put up a for-sale sign.
• There's plenty of rig wrangling in the offshore drilling space as well.