Exclusive: Meet Odin Advisors' Ian Fay

The international, bulge-bracket energy M&A expert has taken his deep expertise to clients

within small- and microcaps, which don't have regular access to big I-bank experience and

relationships.

Nissa Darbonne

December 1, 2010

Ian H. Fay formed New York-based Odin Advisors LLC in January 2009 as his investment-

banking experience at large firms was increasingly taking him away from the hands-on craft of

engineering mergers and acquisitions among energy producers and service companies. His more

than 17 years of experience in deal structuring has been for energy clients that include Allis-

Chalmers, MarkWest Energy Partners, Citgo, Geokinetics, Buckeye Partners, CNPCI,

Marubeni Corp., Denbury Resources and Oneok Inc.

Over the course of his career, Fay has advised more than 130 companies and contributed to

transactions totaling more than $30 billion in value. Previously, Fay was managing director and

head of the energy and natural resources group, Americas, for BNP Paribas; managing director,

M&A, for RBC Capital Markets, concentrating on North American upstream, MLP and oilfield

services; director of M&A for UBS Investment Bank; a vice president in the M&A group at

Prudential Securities; and an associate at Rothschild Inc.

Oil and Gas Investor visited with Fay recently. Here are some of his observations on the energy

industry, M&A, growth strategy and competition for assets abroad.

Ian Fay: "I’ve been a lot more open to

taking on assignments that I never really was able to at other banks."

Investor: You're primarily advising and consulting on M&A and within the upstream space

these days. Is that driven by the preponderance of deal-making right now or by that your greatest

experience is in the upstream?

Fay: A bit of both. I have a lot of deal experience in oilfield services as well. I've been working

in several different bulge-bracket banks in the course of my career and middle-market banks as

well, and I've determined that there is a great opportunity for someone like myself with 17-plus

years of experience in investment banking—and 15 years of these in M&A advisory—to provide

support to lower middle-market and, in some cases microcap companies, both public and private.

It means that I can avoid competition with my former colleagues; their cost structures and the

size of their organizations require bigger deals and bigger clients. Also, I believe the lower

middle-market and microcap sector of the industry is underserved by bankers with my

experience, my depth of experience. Typically, what you'll find in the smaller to micro-market

discussions are bankers who either lack the experience or the exposure to broader and more

complicated transactions and, therefore, many of the clients in this area don’t get the good advice

they need.

Most of the time the middle-market banks can't, but in specific circumstances, take on new

assignments that are small—$50 million or lower. I've seen a drop-off in advice for this size of

energy company. It's a huge market and it's greatly underserved. I can still make my economics

on a $50-million dollar deal because I'm not as overhead-intensive as large firms.

Investor: What assignments have you taken on since forming the firm?

Fay: It's been a variety. Based on the fact that I'm nimble in terms of our organization, I’ve been

a lot more open to taking on assignments that I never really was able to at other banks, like

consultancies in which I provide ongoing support, strategic advice directly to CEOs. I did that in

an assignment for a private oilfield-service company based out of Argentina. I worked with the

CEO who was the son of the founder at a strategic crossroads to find his way towards strategic

alternatives, whether that was making an acquisition of another small company, managing his

existing operations in a more efficient way as they grew, accessing private capital markets or

considering merging with another like-size entity to mitigate risk while growing the company.

That's one end of the spectrum for my assignments, and I've had a handful of those.

Another assignment in that vein is one in which I advised the chairman of a venture-capital-

backed company. The company wasn't big enough to enjoy having a corporate-development

officer, so the board asked me to play that role. Again, it was more to my skillset: M&A,

strategic alternatives, etc.

The other end of the spectrum is more traditional for M&A advisory and similar to what I've

done in the past, which is larger, more transformational deals—what I call "control transactions,"

which means either advising companies to buy other companies and in doing so, buying the

entire company, or having dialogs with companies to sell either a portion of their company or the

entire entity. I've been very fortunate to have a handful of these sale-oriented assignments during

the past 18 months. In particular, I have one right now for a multi-national, public E&P company

that is looking to sell to another E&P company.

Investor: What's making the market tick right now? Is it gas? Is it oil? Is it gas only if you can

hold onto it for a really long time, and not if you have to make it perform on a quarterly basis?

Fay: Regarding U.S. gas in particular, I share the view that it's out of favor right now among

many investors. I'm sure you appreciate that herd investors tend to be fickle and can drive

acreage pricing to uneconomic levels with their investments, and a great deal of investment has

gone into the gassy shale plays over the past several years. Many of those same investors are

now reallocating their investments to the more oily or liquids-heavy regions of the shale plays.

I think there is definitely a contrarian opportunity for longer-wait-on-return-time-type investors.

People expect that gas prices will benefit from the weather in the coming months, but there is

great uncertainty regarding mid- and long-term gas prices in the U.S. If you look hard enough,

you’ll find somebody with a very convincing argument on both sides of all these issues.

Many investors are feeling more confident with the oil price forward curve right now. Patience is

definitely going to be the only way to play a lot of these shale opportunities and, as an example,

because natural gas is seemingly oversold right now, you see some folks swapping some of their

gas acreage in the shale plays for oily acreage, potentially where it's not producing but where

there are prospects.

Investor: What do your clients think of conventional oil and gas, such as offshore, in the Gulf of

Mexico, or in the conventional Permian and Midcontinent?

Fay: Look at what TPG Capital just did. This is one of the most sophisticated and long-

standing, successful, private-equity houses out there, and they just formed Petro Harvester Oil

& Gas. Petro Harvester's stated goal is to look for conventional oil and gas opportunities in

North America, based on its belief that the conventional area has become undervalued. Those are

pretty heavy words: undervalued conventional resources in this marketplace!

Investor: And then the Gulf of Mexico?

Fay: The situation for energy companies in the Gulf of Mexico has certainly been a mess since

the BP disaster. Going forward, deep water is going to require deep pockets. It's likely that the

large integrateds and the supermajors are going to be who come out in the mid-term with more

assets, but that's not very different from the past trend. The economics of deep water are pretty

limiting in terms of who can afford to play, even just for the infrastructure to explore. The deep

water and the ultra-deep water have been the playground for the big companies already and that

will continue, if not become more prevalent.

Investor: And then, in the shallow Gulf, who will the buyers be?

Ian Fay: There are a significant number of companies in that area, the majority of which are

U.S. companies. I think it's going to be a lot more asset-driven deal-making; it's not going to be

corporate. It's going to be players that are maybe managing their cash a bit more tightly, trading

to other companies that may be in a bit better position from the standpoint of the capital markets

and from the standpoint of going into this new, uncertain regulatory regime with a bit more

balance-sheet strength. In the near term, it's going to be more robust activity because there are a

lot of companies that have been holding on for dear life. Those companies may not be able to

make it to the end of the runway.

Investor: Onshore the U.S., there have been many joint ventures. Do you expect any of these

may eventually just buy out their U.S. partner in corporate transactions or maybe with cash?

Fay: Likely not. It's still difficult or impossible for the NOCs like CNOOC and the like to carry

out control transactions for U.S. energy companies. I don't see that changing. For other large

foreign companies that may be able to use their stock as consideration in a transaction, if you're

looking at it through the eyes of a U.S. shareholder, their stock is not very compelling. As such, I

would expect that, if there were to be a major buyout of a U.S. energy company by a foreign-

controlled entity, it would be for cash, though, given the recent furor over resource security and

the ongoing debate about the U.S.' need for energy independence, I just don't see that happening.

Investor: What pressure are NOCs creating in competition by private-sector buyers for access

and assets abroad?

Fay: In the U.S., the NOCs have largely been relegated to the JV route for investment while,

outside North America, they are very active buyers. For my U.S.- and Canada-based clients that

are in, or want to be in, Southeast Asia, West Africa, Latin and South America, etc., it's very

tough for them to be competitive when Asian NOCs like CNOOC, Sinopec, KNOC and the like

are very aggressively bidding for the same assets.

The NOCs are more concerned about resource control and supply than they are about overpaying

for an asset. You've got Sinopec buying Brazilian assets from Repsol for billions of dollars, and

buying Addax Petroleum for access to West Africa for billions of dollars. You have the Indian

companies paying big premiums as well; we just saw that Essar went into a big play in Nigeria.

And, though they are not quite as clearly "NOCs" as their Asian counterparts, the Russians have

been making some interesting moves into West Africa as well.

Increasingly, through a lot of dialog, you believe what people are saying about how the access to

easy oil is diminishing. The dialog is international; it's something we can't avoid, and the NOCs

are making it very hard for the large U.S. independents and the U.S.-based majors to win on

price in a competitive situation.

Investor: How do you help small E&P operators understand what they will be up against when

looking abroad?

Fay: Clients, particularly U.S. clients, ask me to keep one ear to the ground in the international

marketplace. Even in our back yard is a significant amount of activity—in Latin and South

America. Brazil is emerging as a global energy powerhouse, but one of the themes that is

emerging is that there aren't enough service companies to provide all of the resources necessary

for the development of these Brazilian assets. Well, I believe that is a huge opportunity for North

American oilfield-service companies. That's not to say the major service companies aren’t all

over this, but there are companies that I'm working with right now in places like Argentina that

are already consolidating in the oilfield-services sector to provide a Pan-Latin American

solution. The reality for this theme is that a lot of the local companies in these regions are going

to get the first bid on the contracts just by nature of nationalism. A real opportunity exists for the

smaller U.S. service companies with a significant amount of expertise in their focus areas to JV

or merge with a South American company to take advantage of the inefficiencies in those local

markets.

In the U.S., there's a huge opportunity for consolidation in the services sector too. There is

enough shale activity and disaggregation among the service companies that there is a huge

opportunity for consolidation.

Investor: What is a common error in thinking in asset or corporate deal-making?

Fay: I've found that one of the most common errors is that of omission—when corporate or asset

buyers don't plan ahead to the post-acquisition integration with enough detail and care. The

buyer needs to analyze all the details of what they're buying and integrating. My advice to my

clients on the buyside is to assemble a small team with the specific responsibility internally of

integrating the assets. Call it the "integration committee," so they’ll start thinking about people

issues, asset and operational issues, product-distribution issues, pricing issues, customer issues,

etc.

Much of the time, if the buyer is stretching on valuation, it's because they see a certain synergy

post-acquisition. If you're a public company, obviously you want to realize that synergy sooner

rather than later, to deliver that value to your shareholders. Without proper planning of the

integration, many times it's not ever realized or realized far too slowly. You need to be three

steps ahead of the deal, particularly as it relates to the integration.

Investor: Is there disparity currently in the financial markets' view of the value of E&P assets

with that of operators' view? Does one think they're worth more than the other?

Fay: I spend a great deal of time in both the global financial-market cities—New York,

London—and in the oil cities—Houston, Denver, Calgary. In energy M&A, we all fall back to

the same formula: first, asset value based on commodity prices, location, prospectivity, team,

upside potential, and the like; and second, some strategic advantage one of the potential buyers

typically brings to the negotiation that results in that bidder's ability to bid a premium. If you're

talking to a private-equity sponsor, well, their criteria will be slightly different than another

strategic buyer's might be, so it's marrying the two disciplines, if you will: the financial

discipline, driven by returns and financial efficiency to the old, tried and true, operational

discipline, driven by performance, quality and growth. If I do my job effectively, there should be

very little disparity between the two when applying these criteria to underlying value.

Investor: Do you expect other, nontraditional U.S. onshore players in particular to come in, in

JVs? For example, Gazprom, Lukoil, KNOC?

Fay: I think that, if I were a betting man, it is more likely that a KNOC enters the U.S. market

than a Gazprom. There is an abundance of gas in Gazprom's backyard, so I don't see them

aggressively looking elsewhere in the short term. Lukoil is a different story. I've seen Lukoil

more aggressively looking in places like Africa than the U.S., likely because they've seen it's a

much easier path to get that oil to markets in that region than from the U.S.

The Asians are so aggressively aggregating production so they can control the resource that I can

see others like KNOC taking an aggressive view of assets onshore the U.S., and politically it is

easier for a KNOC than maybe a Lukoil. We always have to factor in the geopolitical landscape,

however, when we're talking about these types of names as suitors for U.S. companies or JV

partners.

Investor: I saw no commentary from Washington on CNOOC's deal with Chesapeake Energy

Corp. in South Texas. Has Washington come to understand it has done nothing to encourage

greater use of natural gas domestically, so those who own it have to find the greatest value for it,

some way, somehow?

Fay: It is definitely hard to avoid drawing that kind of conclusion and I am one among many

who would really like to see Washington spend much more political energy in support of natural

gas for our domestic preservation and energy independence. These U.S. companies have

shareholders that are U.S. citizens and are legislators' constituencies. Until natural gas takes a

much larger percentage of our domestic energy consumption, in areas like electric generation and

transportation, just to name the biggest two areas in my view, companies like Chesapeake will be

forced to make these JV transactions with the NOCs in order to continue to deliver shareholder

value in the face of depressed gas prices.

The good news about Chesapeake is it's been very good about trying to educate Washington. It

must be frustrating. Part of the problem is that the coal industry has had lobbyists in Washington

for decades, hundreds of years, and the natural gas industry's is a relatively new lobbying effort.

People have to eventually recognize that natural gas has half the carbon footprint of coal and is

abundant in this country. Until that time, we will see more of these types of transactions

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