Sinking Profits

Houston Has a Problem

Well Colorado Glow Images
Siemens is sinking major money into the Dresser-Rand deal.
  • Why it matters

    Why it matters

    New drilling technologies have led to record oil and gas production levels in the United States, sharply reducing the price of oil. Germany’s Siemens conglomerate has agreed to buy oil equipment maker Dresser-Rand, which has been adversely affected by the declining oil price.

  • Facts

    Facts

    • Dresser-Rand manufactures compressors, turbines and engines for refineries, natural gas and oil producers and biofuel power plants.
    • The Siemens takeover bid for Dresser-Rand is worth $7.6 billion.
    • With U.S. companies investing more than $500 billion in oil and gas wells across the United States, equipment manufacturers like Dresser-Rand stand to benefit from the associated infrastructure expansion.
  • Audio

    Audio

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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.

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