PHX Energy Services (PHX) could be an interesting way to play the ongoing consolidation in energy, given the majors they serve (16 of the top 20 NA producers) are the ones doing the buying. With higher oil prices driving more aggressive capital plans…

… there’s structural demand for directional drilling services, with upside from increased adoption from its Rotary Steerable System (RSS) technology.

I’ll save the technical details and frame this in the context of M&A. A producer that’s landlocked (green) can only drill a lateral well to the edge of the acreage it owns…

… incentivizing the purchase of neighbouring assets so it can extend that well, increasing production and returns. When those wells get past two miles, RSS drilling dramatically outperforms older methods…

… and runs at much higher margins, with a ~$35K per day price tag versus ~$15K for non-rotary jobs. So to recap, consolidation → longer wells → RSS demand → improved cash flow generation for PHX…

… which is likely underpriced if it plays out that way over the next few years, with the current multiple sitting modestly above the five-year average at ~4x.

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