The $7.6 billion acquisition of Dresser-Rand is Siemens’ latest move in its bid to enter the booming US shale oil & gas market.
Ever since Siemens’ long-time chief financial officer Joe Kaeser took over as chief executive last year, 2014 looked bound to be a year of change at the German engineering giant.
Earlier this year, he announced a major company reorganisation, effective from the start of this month, that eliminates layers of management and sharpens the company’s focus on the North American market, in particular the oil & gas market.
That strategy was supported by the acquisition of Rolls-Royce’s aero-derivative gas turbine and compressor business and the hiring of Shell executive Lisa Davis to become the US-based chief executive of Siemens Energy Sector.
The truth is that the energy business has both clean and dirty sides
ARC Advisory group RD David Humphrey
The latest and most significant step in the strategy came last month, when Siemens announced plans to acquire rotating equipment specialist Dresser-Rand for $7.6 billion.
Subject to approvals, the deal is expected to be completed by the summer of 2015. Davis will run the whole energy business from Houston, the first time that a major Siemens division will be located on another continent, and Dresser-Rand will become “the oil & gas company” within Siemens.
Davis said she hoped Siemens would become “the leading rotating equipment and process system integrator for the oil and gas industry”.
ARC Advisory Group research director David Humphrey says the move to Houston was unlikely to be difficult for Siemens’ oil & gas business, as it was “never well integrated into the Siemens structure”.
However, he adds that many in the industry believe Siemens has missed the boat when it comes to the US shale boom.
“The first reaction of many is that Siemens is late to the game in North America’s shale-gas industry, and $7.6 billion is a high price to pay for Dresser-Rand,” says Humphrey.
“But Siemens sees long-term opportunities for itself in the oil & gas market, expecting growth in this segment of 6 - 8% after 2016. Moreover, the cost of not acquiring Dresser-Rand could have been much higher for Siemens. Swiss-based Sulzer, headed ironically by Peter Loescher, who was squeezed out as Siemens’ chief just a year ago, was said to be bidding for Dresser-Rand. But Sulzer is not Siemens archrival in North America, nor does it pose a threat to Siemens elsewhere in the world. This distinction goes to General Electric (GE), the company that earlier this year went head-to-head with Siemens in a bidding war for France’s Alstom – and won.”
Indeed, Humphrey says Siemens’ acquisition of Dresser-Rand gives it the two-fold benefit of both gaining market share in the US shale segment and strengthening itself in areas where GE is its main competitor.
“The deal creates a supplier with the rare combination of a broad portfolio of process automation solutions complemented by a portfolio of specialised heavy equipment such as compressors and turbines,” he says.
“The only company with a similar profile is GE. The deal will likely result in greater [sales] for Siemens’ process automation business through Dresser’s customer base.”
Humphrey adds that in the future Siemens might consider embedding more sophisticated forms of automation and control directly in oilfield equipment, creating more complete solutions.
The acquisition of Dresser-Rand’s strong market position will also bring benefits for other key industries for Siemens, such as downstream, process chemicals and petrochemicals that, says Humphrey, could lead to pull-through sales of Siemens’ Simatic PCS7 DCS platform as well as asset lifecycle management services.
The deal also offers Siemens the chance to participate in the current liquefied natural gas (LNG) boom as the US exports excess shale.
However, there are doubts about other areas of the deal, in addition to the question of whether Siemens is too late to US shale.
“What will Siemens ultimately do with Dresser’s commercial nuclear products, which include high-pressure coolant injection and auxiliary feed water steam turbines,” asks Humphrey.
“Three years ago, Siemens announced its intention to abandon its nuclear power business following the German government’s decision to phase out nuclear power by 2022.
“If the company intends to maintain that policy, it might eventually sell off this business.”
To Frack or not to Frack
There are also critics of the deal pointing out that Siemens’ entrance into the fracking business is inconsistent with its green image as a technology provider for renewable energies.
“The truth is that the energy business has both clean and dirty sides,” says Humphrey. “Siemens will have to learn to explain how these sides go together – especially in environmentally-conscious Europe.”