Europe’s biggest engineering conglomerate is shifting the center of gravity of its oil and gas business to the United States in a multibillion-dollar transaction that weans it off Europe’s sluggish economies and high energy costs.
Siemens AG’s $6.5 billion purchase of Houston oil field equipment maker Dresser-Rand Group, announced Sunday, will give the German industrial giant control of gas-powered turbines, compressors and supersonic engines assembled to accommodate a surge in U.S. natural gas that has made it far easier to do business in the United States than in Europe, where gas-fired power plants play second fiddle to renewable energy sources amid regulatory changes unfavorable to fossil fuels.
In crowning Dresser-Rand as its primary oil and gas segment, Siemens has found that moving U.S. shale gas is better business and offers a merciful respite from Europe’s struggles, which have impeded manufacturers like Siemens and GE.
Europe “seems to be getting indigestion with the energy that’s being put in,” said Chris Ross, a finance professor at the University of Houston. “Siemens, over the last few years, has been challenged by the change in energy policy within Germany.”
Those rule changes include a rapid increase in the region’s reliance on renewable energy, which has come with increased energy costs. That has pushed Siemens, like GE, to respond to the powerful lure of the U.S. shale energy profits.
“Cheap energy gives the U.S. significant cost advantages over the rest of the world,” said Marshall Adkins, an analyst with investment bank Raymond James.
And while China, Japan and Europe have all seen disappointing economic growth in the past year, he added, the United States has seen more economic activity while shale wells flow hydrocarbons and bring down the cost of energy.
Two-thirds of Siemens’ manufacturing sites in Houston and most of its 1,500 local workers are dedicated to making equipment that isn’t sold to the oil and gas industry. That balance will shift when Siemens absorbs Dresser-Rand’s 800 employees and 130,000-square-foot service center in Houston into the company.
In addition to about $6.5 billion in cash, or $83 a share for investors, Siemens’ deal with Dresser-Rand means the firm will assume about $1.1 billion in debt. It is the company’s biggest move yet to pounce on the U.S. shale energy surge, one facet of a plan to accelerate its growth through 2020.
In a conference call with analysts and journalists Monday, Siemens CEO Joe Kaeser acknowledged that the German company is making a big gamble on the U.S. market, but said he’s confident in positive projections on shale’s growth.
Houston figures prominently into Kaeser’s plan to take on GE in the turbine and compressor business, as Dresser-Rand, which has about 45 percent of its business in the U.S., will keep its brand name, top leadership and close relationships with clients in the epicenter of oil and gas.
“The business generated by decision-making in Houston is a multiple of what you already see happening in the United States,” Kaeser said. “Through our global distribution network we can follow any oil and gas company anywhere in the world and help them develop their business.”
Siemens’ new focus on the U.S. oil and gas sector follows a similar line of thinking by rival GE, which last year snapped up pump maker Lufkin Industries for $3.3 billion and, in 2011, bought electric submersible pump maker Wood Group for $2.8 billion.
Siemens, which has 150 manufacturing sites across the United States, “had not really had much of an oil and gas business, and it looks at GE which has been investing in the sector – these companies watch each other closely,” Ross said.
But with the purchase of Dresser-Rand, as well as a previous $1.3 billion acquisition of Rolls-Royce Holdings’ energy business this year, Siemens is becoming “a real contender in the oil and gas business,” said Lisa Davis, a member of Siemens’ board of directors. “If you’re going to be in oil and gas, you need to be in Houston.”