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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:

Precision Drilling is a Global Gains selection. Chesapeake is an Inside Value pick. Drill into any of our newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

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Related Tickers

8/18/2008 4:00 PM
WHQ $89.13 Down +0.00 +0.00%
W-H Energy Service… CAPS Rating: *****
CHK $6.08 Up +0.08 +1.33%
Chesapeake Energy CAPS Rating: ***
DVN $40.46 Up +0.26 +0.65%
Devon Energy CAPS Rating: ****
HP $64.16 Down -0.72 -1.11%
Helmerich and Payn… CAPS Rating: ****
PDS $4.76 Up +0.05 +1.06%
Precision Drilling… CAPS Rating: ****
SII.DL2 $0.00 Down +0.00 +0.00%
Smith Internationa… CAPS Rating: *****
XTO.DL $41.81 Down +0.00 +0.00%
XTO Energy, Inc. CAPS Rating: *****