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In September 2014, Siemens announced its plans to acquire Dresser-Rand, a Texas-based oilfield equipment and services provider, for $7.6 million (€5.8 billion). The deal will most likely be completed by the middle of 2015. With this acquisition, the company is making a clear statement about its commitment to the lucrative oil & gas market. However, since that announcement, a lot of factors have changed in the world. The dollar has strengthened while the oil price has tumbled. Even at existing exchange rates in September, Siemens CEO Joe Kaeser admitted at the time that the price was "on the high side".
Is Siemens paying too much for Dresser-Rand?
Looking back half a year, the timing of the deal was clearly unfortunate. The dollar had just begun to strengthen against the euro and by the end of January 2015 the dollar had gained 18 percent on the European currency with no end in sight. That gain drives up the price of the deal by about one billion euros at current exchange rates. However, Siemens claims that it will pay for the acquisition through its US entity using existing currency reserves in US dollars. But even at a price tag of a billion euros more, would Dresser still be worth it?
In the same period, the price of crude oil dropped by about half, causing a shock to the system with repercussions, both good and bad, for markets around the world. While lower energy prices will likely drive up consumer spending, for the oil & gas equipment market it could lead to lower or delayed investments in exploration and production. Cost-intensive technologies such as fracking and oil sands, common in North America, need a barrel price of at least $70 to $80 to remain profitable. Anything below that will likely result in production cutbacks and layoffs as well as cancellations or delays of new investments. Oil prices are currently hovering around the low to mid $40/bbl range.
With oil prices in the basement, does the outlook for Siemens oil & gas look gloomy?
Not likely in the mid-term. The oil & gas industry has survived plenty of crises of political, geopolitical and economic nature, and is considered one of the most resilience industries. Increasing demand for energy and petrochemical products eventually will stabilize the market despite current political influences and challenges from alternative energy sources. However, there is still the long-term threat of diminishing returns. As western oil companies spend more and more of their cash reserves to extract oil from difficult places such as deep in the ocean, the production glut these efforts produce may drive down the price of oil, eventually rendering them uneconomical and suppressing further investment.
For Siemens, probably the most immediate benefit from the Dresser acquisition is not so much the revenue from potential investments in oilfield equipment, but rather the access to the company's customer base, particularly in North America, and most of all the revenue and profit from services to these companies. Oilfield production equipment, like compressors, is expensive, both to procure and maintain, because it operates in extremely harsh environments. Guaranteeing equipment availability is a top priority. As more and more companies switch to outsourcing models for maintenance and even operation, the market for oilfield services has exploded. Even though Siemens is a latecomer to the North American oil market, there is still likely plenty of growth and opportunity – even if the current low oil press has put a temporary damper on market enthusiasm.
In short, considering the long-term benefits and the market position to be gained, Siemens probably cannot afford NOT to acquire Dresser.