Why Siemens Is Betting $7.6 Billion on the Global Fracking Business

NEW YORK (TheStreet) -- Siemens' (SIEGY) purchase of Dresser Rand (DRC) will give the German conglomerate exposure to the North American hydraulic fracturing market and allow it to capitalize on the growing interest in "fracking" in Europe, Asia, Africa and Latin America to boost oil and gas production.

Dresser Rand is a major manufacturer of the equipment that drillers need as they tap shale rock formations through hydraulic fracturing or "fracking." The company had $3 billion in revenue last year, vs. Siemens oil and gas revenue of $6.55 billion. Siemens as a whole had revenue of $100 billion.

With the $7.6 billion cash purchase, Siemens is at once building a large presence in the established North American market and also buying the Dresser Rand brand, one that the company believes will resonate with oil industry customers as fracking is adopted globally. Half of Dresser Rand's revenue comes from services contracts with drillers and midstream companies. Siemens hopes to exploit that customer base as the fracking market expands outwards from North America.

The deal is expected to close in the summer of 2015.

Must Read: Siemens to Buy Oilfield Equipment Maker Dresser Rand

Industrial giants such as Siemens and competitor General Electric (GE)  are spending heavily on acquisitions of oil and gas equipment manufacturers to diversify from their traditional expertise in utility and power grid machinery. With Dresser, Siemens sees a changing energy landscape.

Giant deep and shallow-water oilfields have been the focus of giants like BP (BP) , Exxon-Mobil (XOM) and Shell for a generation. As that activity peaks, Siemens hopes to fill the void with a growing portfolio of smaller, less centralized fields in onshore rock formations. "The acquisition of Dresser Rand allows us to push our concept of decentralized energy," Siemens CEO Joe Kaeser said of Monday's acquisition on a call with analysts.

A Bet on Global Fracking

Siemens has focused on oil and gas in North America to drive growth in its struggling energy division. Large shale discoveries and a renaissance in drilling activity have benefited pipeline players like Kinder Morgan (KMI) and Energy Transfer Equity (ETE) , which are building the infrastructure to transport oil and gas production across the country. Bountiful natural gas supplies in North America are also creating optimism surrounding the export of liquefied natural gas (LNG) to Europe and Asia, in coming years. With Dresser Rand and other acquisitions, Siemens is angling to be an equipment supplier across those markets.

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"Through the transaction, it seems clear that a wise and informed grand investment in fracking is being made," David Tawil, president of hedge fund Maglan Capital, said in an e-mail to TheStreet. Through its investments, Maglan has exposure to large shale deposits in Argentina, a region of particular interest to Siemens that is increasingly becoming the focus of international drillers as the country opens its doors to foreign investment.

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