“This industry does not count by quarter or year. This counts for a long period of time,” Joe Kaeser said this week.
He was talking about the energy industry, specifically in North America, where the recent flurry of oil drilling and production growth has companies from all over the world shelling out big money for a stake.
And they’re all following the same mantra as Kaeser…
They’re playing the long game: buy a huge stake up front and watch its value grow bit by bit over the years.
Although your typical speculator is impatient and finds this time-tested approach of steady, consistent growth boring, it’s how millionaires and billionaires are made.
Investment gurus from Benjamin Graham to Warren Buffett to Jim Rogers all follow this same slow and steady path to their wealth.
And now Kaeser says the same thing…
Who is Kaeser?
On Sunday, Kaeser’s company, Siemens AG (OTC: SIEGY), bought American oil and gas services firm Dresser-Rand Group (NYSE: DRC) for $7.6 billion.
Analysts in Europe and the U.S. denounced the deal… Most called it somewhat strategic but ultimately overpriced.
Your humble editor couldn’t disagree more.
Here’s more from Kaeser on Dresser-Rand: “We do agree the price has been on the high side but, then again, it matters more what value we created.”
The key is in long-term value.
Sure, Siemens paid more than double what Dresser-Rand made in revenue last year for the company.
And according to most, the company’s services arm slumped in recent years, too.
However, this dip in Dresser-Rand’s usually profitable business works in Siemens’ favor by giving its negotiators leverage to keep the purchase price at $83 per share.
Not only that, but in buying DRC, Siemens positions itself in the booming North American energy space.
Here’s What Siemens Really Wanted…
The North American energy space is the key component of this deal.
Annual CAPEX on oil, gas, and coal equipment surpassed $950 billion in 2013, which is more than double what it was in 2000, according to the IEA.
Plus, Dresser-Rand has a huge stake in a big, new industry within North American energy.
Among a host of other products and services, it supplies the heavy equipment (compressors, generators, refrigerants) for liquid natural gas plants — the likes of which have been gaining approval faster and faster as the EU and Asia look to take advantage of low natural gas prices in the United States.
And now that Cheniere Energy, Sempra Energy, and several other big-time conglomerates have completed the approval process, it looks like Siemens has positioned itself to find value in LNG plant equipment.
Add to that the servicing and updating of said equipment over time, and you can see where Mr. Kaeser will find his long-term value.
Plus, its products will be central to powering thousands of European homes — including those in Germany, where Siemens has its international headquarters — once exports land there in 2015 and beyond.
So there’s some PR value in the deal as well.
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What About Investor Value?
Even though I spent most of this article lauding the merits of Mr. Kaeser and the Siemens purchase of Dresser-Rand, I do not recommend a buy right now.
Keeping in line with our focus on safe, long-term value, I’d say the move is risky, since the price of DRC went nuts on the news.
Truth is, I’d wait until long after the dust settles on the deal when it officially closes next summer. And even then, the prices may still be too high for it to be attractive.
Instead, I would suggest a long-term, high-yield investment in U.S. energy services companies that have already established themselves on a long-term growth track.
Two such companies are Compressco Partners, L.P. (NASDAQ: GSJK) and Hi-Crush Partners L.P. (NYSE: HCLP).
The two firms, both MLPs, boast strong records in the North American tight oil industry…
And both also boast high dividends.
Hi-Crush, a supplier of frac sand and proppants for drillers, pays a healthy yield of 4.18%, while Compressco, a vapor collection services company, pays an even larger 7.51%.
So if you want to mimic Siemens’ movement into North American high-value energy services, look no further than these two long-term opportunities.
Just be wary: If any new technologies crop up that could displace frac sand or other services either company provides, it will be time to sell for long-term gains.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
