Siemens On The Gas Path - Markets Should Appreciate

Jul. 5.14 | About: Siemens AG (SIEGY)


Siemens' statement that it is looking for acquisitions in US unconventional gas should be well received by investors.

The company will build on its already integrated energy offering, address potential risk from losing out on Alstom, and get in on the strongest growth sector in energy.

I expect Eur 3-6bn acquisition, in line with strategy, that won't disturb Siemens' efficiency program.

Siemens' statement that it might look for acquisitions in the US to take advantage of growth in the unconventional energy sector should get well received. The company targets the strongest growth sector within energy. It opens the prospect to build up a track record in a synergistic way with its existing energy offering. It enters the quest for service revenues. With that, it not only swiftly addresses potential concerns on it losing out on Alstom; it proactively opens new potentially high margin business and gets on a path to transpose any expertise globally and last but not least to Europe. I expect any acquisition to be in mid size territory, in the order of Eur 3-6bn. With that, the focus on the efficiency program will be undisturbed.

The CEO of Siemens has said he is open to acquisitions in the US gas sector as he sees attractive growth from shale gas. I agree that the US unconventional sector is a very attractive end market where growth opportunities for equipment manufacturers are plentiful. Beyond that, Siemens is clearly looking for follow-on service contracts that will provide high margin business and long-term stable cash flows. Siemens is not alone in the quest for service revenues. It is a feature throughout the sector and driving equipment market share competition.

The GE/Alstom deal may have sharpened Siemens' focus on gas equipment. Management may now more than ever see the need to add to its global market share, with a very powerful competitor that has gained scale in a significant way. Siemens has also put significant work into the Alstom deal and may have well assessed its strength and weaknesses in the sector again, and its ability and willingness for acquisitions.

Management has made it clear before that it can engage in small to moderate sized acquisitions. That should not distract from the efficiency program. The recent acquisition of Rolls Royce's energy assets is an example.

Siemens has the balance sheet for good sized acquisitions, with cash of Eur 8.5bn, and debt capacity in the order of Eur 8bn, according to my estimate. I would expect the company to use no more than a fraction of that. The Alstom offer would indicate a willingness to look at targets in the order of Eur 3-6bn in size. I gather that fits with the company's prime focus on reshaping and its ability to integrate a potential acquisition.

Market share gain in the US will be a struggle, with very strong domestic competitors, large and small. The acquisition route of an established name with strong reputational equity will in my view be the only way to make meaningful inroads.

Siemens may also be looking to grow a track record in the US in order to develop expertise and a reputation that it can transpose to Europe and even other regions with unconventional energy development. At the moment, unconventional energy, chiefly gas in Europe is in its very early stages of development. Uncertainty as to how much, with what success and where it will be developed is very high. But the many strategic energy challenges Europe faces, to name just security of supply, gas dependence and affordability in this discussion, in my view, make for a backdrop where chances are resources will be developed. In my view, it is a correct strategy for Siemens to develop a positioning to build on its energy engineering leadership in the sector. Unconventional energy is an end market that will see the strongest rate of growth within the energy sector as a whole. Unconventional gas supply will grow by 55% to 2035, according to the IEA. It is a market that the company should seek a global presence in, and US expertise will be the springboard. The company will find itself in competition and cooperation with the energy services sector as it will likely grow its component and service offering towards integrated solutions. That will also mean commodities as an earnings driver will become more important than they already are. Commodity prices drive energy equipment order flow.

I see Siemens' statement as consistent and likely to be well received.

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