2014 was bound to be a year of change at Siemens, the German engineering giant. Last year, long-time CFO Joe Kaeser took over as CEO and promised not only to bring profitability back in line with industry peers, like ABB and General Electric, but also to strengthen the company's position in key growth industries, like oil & gas. Earlier this year, Kaeser announced a major company reorganization, effective October 1, 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 Lisa Davis, an executive at Royal Dutch Shell, to become the US-based CEO of Siemens Energy Sector.
This week, Siemens announced plans to acquire Dresser-Rand, a Houston-based oil equipment maker, 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. The oil & gas business was never well integrated into the Siemens structure, so this "move to Houston" should not be difficult.
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. But Siemens sees long-term opportunities for itself in the oil & gas market, expecting growth in this segment of 6 to 8 percent after 2016. Moreover, the cost of NOT acquiring Dresser-Rand could have been much higher for Siemens. Swiss-based Sulzer AG, headed ironically by Peter Loescher, who was squeezed out as Siemens' CEO 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, the company that earlier this year went head-to-head with Siemens in a bidding war for France's Alstrom – and won.
Wide Range of Benefits
The real value of Siemens' acquisition of Dresser-Rand is two-fold, but the deal also contains many other opportunities for future growth:
1) The strong market position of Dresser-Rand in North America gives Siemens the boost that it needs to penetrate the booming shale-gas market by acquiring market share and customer contacts. Siemens is already a supplier of gas turbines and equipment for extracting natural gas and can now expand these capabilities and more directly profit from hydraulic fracturing in the US with the addition of compressors, turbines and other rotating equipment from Dresser-Rand.
2) The deal creates a supplier with the rare combination of a broad portfolio of process automation solutions complemented by a portfolio of the specialized, heavy equipment, such as compressors and turbines required in applications ranging from offshore drilling platforms to LNG plants. The only other supplier with a similar portfolio is, once again, General Electric.
The advantages of this combination are proof that the lines between equipment and automation increasingly are blurring. The deal will likely result in greater pull-through for Siemens' process automation business by accessing Dresser's vast customer base. In addition, Siemens will own the lucrative profit pool from services, which are Dresser highest share of profit and currently account for about half of its revenue. In the future, the company might consider embedding more sophisticated forms of automation and control directly in oilfield equipment, creating more complete solutions.
Finally, other key industries for Siemens, such as downstream, process chemicals and petro-chemicals, stand benefit from Dresser's strong market position, which could lead to pull-through sales of Siemens' Simatic PCS7 DCS platform as well as asset lifecycle management services, such as predictive maintenance.
The LNG Boom
One of the hidden gems of this acquisition is the chance for Siemens to participate in the current LNG boom. Liquefied natural gas (LNG) results from the cooling of natural gas to -162°C, which turns it into a liquid with a volume 600 times less, allowing it to be transported by tanker rather than by pipeline. The current boom is being driven by events in two different parts of the world: 1) in North America, where shale gas is converted to LNG and then transported to market or even exported in the near future, and 2) in Europe, where geopolitics are forcing countries to reconsider expensive LNG technology to reduce their dependency on a belligerent Russia.
Is Siemens Still 'Green'?
The Dresser deal contains two lingering issues that pose potential conflicts to existing policies at Siemens. The first is the question of what Siemens will ultimately do with Dresser's commercial nuclear products, which include high-pressure coolant injection, reactor core injection coolant, and auxiliary feed water steam turbines. 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.
The second issue is about Siemens' image as a provider of green (environmentally friendly) solutions. Shale gas extraction involves hydraulic fracturing ("fracking"), a process that employs large amounts of water and toxic chemicals to crack open shale rock and release natural gas trapped there. Fracking is a dirty business that is potentially harmful to the environment. Fracking projects around the world have been accompanied by protests, bans and moratoriums over their impact on air, water and human health. The fracking question is even more acute in Siemens' home market of Europe where the population density is much higher than in the US.
To Frack or not to Frack
Critics are pointing out that Siemens' entrance into the fracking business is inconsistent with its green image as a technology provider for renewable energies and solutions for energy efficiency in power generation, transmission and distribution, the smart grid, and building technologies. But just like Siemens, Dresser-Rand is a complex company that offers a wide variety of diverse products and solutions. This includes a portfolio of environmentally friendly technology platforms, such as designed and packaged combined heat and power systems, biogas-fueled gen-sets, biomass and waste-to-energy steam turbine generators, and compressed air energy storage. The truth is that the energy business has both clean and dirty sides. Siemens will have to learn to explain how these sides go together – especially in environmentally conscious Europe.
When he presented his Vision 2020 strategy earlier this year, CEO Joe Kaeser prescribed for Siemens one of the most comprehensive reform packages in the history of the company. Previous CEOs have reorganized and polished portfolios, but Kaeser's plans may turn out to be the largest postwar reinvention of the 167-year-old company. Kaeser is showing the industry that he, and Siemens, mean business.
Keywords: Oil & Gas, Shale-Gas Industry, Gas Turbines, Hydraulic Fracturing, ARC Advisory Group.