Sinking Profits Houston Has a Problem

The falling price of oil is putting a strain on equipment maker Dresser-Rand. This is unfortunate timing for Siemens, which is poised to acquire the company.
Siemens is sinking major money into the Dresser-Rand deal.

There is only one topic of conversation in Houston, Texas these days: the falling price of oil. The price of black gold has been dropping for weeks, losing about a quarter of its value since October. The oil price is of critical importance to Dresser-Rand, which is using new drilling technology to extract record amounts of oil and natural gas from domestic shale formations. The closer the oil price gets to $70, the more wells become unprofitable. The scope of the crisis is reflected in the prices of shares in producers EOG and Devon Energy, which have fallen by 10 to 15 percent in the last two months.

The stock price of only one company in the business has remained strong – energy equipment supplier Dresser-Rand. On Thursday, shareholders in the Houston-based company will vote on a takeover bid by German electronics giant Siemens for $7.6 billion (€6.1 billion). In light of the current minor oil crisis, the outcome is all but certain: unanimous approval.

"In retrospect, it's clear that Siemens should have waited," says Chris Ross, an energy analyst with the Charles River management consulting firm and a professor of business at the University of Houston.

Ironically, that was precisely what Joe Kaeser, the chief executive of Siemens, and the new head of the company's energy business, Lisa Davis, wanted to do. In light of high production volume, they had anticipated the decline in the oil price and its adverse effect on share prices. But Peter Löscher, the former Siemens chief executive, forced them to take action in September when he tried to acquire Dresser-Rand with his Swiss energy company, Sulzer.

Siemens hurriedly moved ahead with an acquisition that had been planned for 2015. In absolute terms, Mr. Löscher cost Siemens up to $1 billion, based on the share price losses in the industry in recent weeks.

In what industry would you be calling 99-percent capacity utilization a crisis? Chris Ross, Energy analyst, Charles River management consulting

As an equipment manufacturer, Dresser-Rand suffers indirectly from the weak oil price. The company earns about $3 billion worldwide with the sale of compressors, turbines and engines for refineries, natural gas and oil producers and biofuel power plants. To reduce the production costs and keep wells profitable, the company’s customers are forcing down prices.

Nevertheless, says energy analyst Ross, "this is a good acquisition for Siemens." Mr. Ross, who has more than 30 years of industry experience under his belt, has seen similar price declines many times in the past. According to his calculations, a million barrels a day of "excess capacity" oil are currently being produced worldwide, while daily consumption is at 90 million barrels.

"In what industry would you be calling 99-percent capacity utilization a crisis?" Mr. Ross asks. He believes that declining supply and growing demand will lead to higher prices in the medium term.

The fracking boom will weaken, but it will not end abruptly. The drilling method was initially used on a larger scale in 2008 and 2009, during the financial crisis, when oil prices were even lower than today. Companies will have to use new technology to reduce production costs even further, which will ultimately help specialized providers like Dresser-Rand and Siemens if they can provide cost-saving solutions.

In the long term, the companies will benefit from an inevitable infrastructure expansion. U.S. companies are investing more than $500 billion in oil and gas wells across the United States. Production regions in Pennsylvania, North Dakota and western Texas resemble giant islands within the country and have to be connected to the production network through pipelines. Dresser-Rand's engines and compressors are needed to ensure that the oil will flow through those pipelines.

Energy analyst Ross's advice to Siemens is to take advantage of low valuations and make even more acquisitions. If it did, it would be emulating Halliburton, which recently announced its acquisition of competitor Baker Hughes, an oilfield services company, for $35 billion.

 

Thomas Jahn is the New York correspondent for Handelsblatt. To contact the author: [email protected].