HOUSTON – Siemens AG’s $6.5 billion deal to buy Houston’s Dresser-Rand Group is about more than collecting gas turbines and super-sonic engines: It’s about getting access to Houston, the epicenter of executive power in U.S. oil and gas, the German conglomerate’s chief executive said Monday.
“The business generated by decision-making in Houston is a multiple of what you already see happening in the United States,” Siemens CEO Joe Kaeser said in a conference call early Monday with analysts and journalists.
Kaeser was responding to a question from an analyst who pointed out that while Siemens has said its U.S. oil and gas portfolio will largely be “complete” after it closes its Dresser-Rand buyout, the deal only gives Siemens $321 million in new equipment in the United States. Is that, the analyst asked, enough to put Siemens on the map in Houston and in U.S. oil and gas?
“It is more about getting access to decision-making than anything else,” Kaeser said, “because through our global distribution network we can follow any oil and gas company anywhere in the world and help them to develop their business.”
The German industrial conglomerate signed the initial paperwork to buy the Houston oil field equipment maker after midnight in Munich, and said in a statement Dresser-Rand would play the quintessential role in its oil and gas business, keeping its name and top management in place. It addition to Siemens’ $6.5 billion cash infusion, it’s assuming $1.1 billion in debt in the deal. The transaction is expected to close next year.
It’s Siemens’ most pronounced move yet to pounce on the U.S. oil and gas industry, which has seen a renaissance in energy production after oil explorers a few years ago figured out how to soak up hydrocarbons from shale and tight rock formations through hydraulic fracturing and horizontal drilling. The United States makes up about 45 percent of Dresser-Rand’s overall business, according to company materials presented during the conference call.
While Europe, China and Japan have seen disappointing economic growth in the past year, the U.S. has seen an upswing in economic activity driven by cheap energy costs – a direct benefit of the surge in oil and gas production, said Marshall Adkins, an analyst with Raymond James.
“Cheap energy gives the U.S. significant cost advantages over the rest of the world,” Adkins said.
Part of Siemens’ desire to dive deeper into the United States likely stems from troubles it has faced amid regulatory changes in Europe to the energy sector, said Chris Ross, a finance professor at the University of Houston, in an interview Monday.
For instance, Siemens’ home country of Germany has been rapidly increasing its reliance on renewable energy in recent years, cut its nuclear program and faces high natural gas prices. Kaeser has made it clear before that the United States offers a more viable alternative.
Siemens “has done very well within energy, but certainly Europe seems to be getting indigestion with the energy that’s being put in,” Ross said. The sector “is probably not going to see the same success in the future that it has in the past.”
The deal to buy the Houston equipment maker, Ross added, will likely reap rewards for Dresser-Rand, as Siemens’ international footprint and much deeper pockets could launch the business deeper into foreign markets.
Dresser-Rand, which has its main office, 800 employees and a service facility in Houston, made $3 billion in revenue last year selling and servicing turbine and compressor units used in oil and gas, power generations and in other sectors.
Siemens doesn’t expect to immediately have any staff reductions in Houston, Siemens board member Lisa Davis said in an interview with Fuelfix on Monday.
“We’re really not terribly focused on job reductions just yet,” Davis said, adding that Siemens’ staff of 1,500 in Houston doesn’t necessarily overlap with Dresser-Rand’s space. “We really haven’t looked at that in any great detail. Our focus is on how we bring our sales teams together.”
Davis said Dresser-Rand’s steam turbines that generate a fraction of the drive produced by Siemens’ 150-megawatt units are much more equipped to service the oil and gas industry, whether in pumping more hydrocarbons out of wells, or generating power for oil operations or moving stranded natural gas through pipelines from major U.S. shale plays to refineries.
About 29 percent of Dresser-Rand’s revenues last year came from oil and gas production businesses, including gas lift gathering, while 19 percent of its business came from its energy infrastructure segment, in which its units transport, store and process natural gas. Its refining segment brought in 33 percent of its revenue. At 10.6 percent, Dresser-Rand’s profit margins are slightly higher than Siemens’ oil and gas 8.3 percent profit margin.
Houston’s role in the global oil and gas industry has only gotten more prominent in recent years with the U.S. shale energy boom, she said.
“We want to be next to the customers,” Davis said.
Dresser-Rand shares rose $2.09 in early trading Monday to $82 on the New York Stock Exchange.