From Engineer to Finance: A Blueprint for Modern Energy Finance

Megan - 00:55: Today, my guest is Zach Kimball. Zach is a high-performing and self-guided engineer with operations-based leadership and management roles in upstream and midstream petroleum development. Zach has served in highly diverse roles in small consulting companies, major service companies, and independent operations. Zach has experience in engineering and business development, experience in conventional and unconventional development, both domestically in the US and internationally in Africa. Zach is an efficient and proven leader in developing and optimizing assets and thrives under pressure and embraces challenges. Zach is a collaborator, people developer, and a friend, and Zach currently serves as Vice President of Finance and Strategic Planning at Citation Oil and Gas Corp. Zach, thank you so much for being my guest on today's episode of CFO Weekly.

Zach - 01:49: Thanks, Megan. I really appreciate you bringing me on.

Megan - 01:51: Today, our conversation centers on the oil and gas sector, specifically the mounting challenges of managing aging assets against the backdrop of escalating production costs. And I'm really eager to learn more about your perspective and experience with this, so let's just jump right in. Alrighty. So, when you first stepped into the world of oil and gas finance, what was the biggest surprise about how aging operations impact financial strategy?

Zach - 02:19: Well, I first came into oil and gas finance. I thought it was really gonna be all about commodity prices and capital allocations, and I mean, that is a big part of it. But what really surprised me is how aging assets completely change the way you operate. Production declines, maintenance costs rise, and even environmental liabilities become central to the financial conversation. We care about growth, but our day-to-day business can be less about chasing growth and more about expanding value intelligently, which is actually a theme that applies beyond oil and gas and in any mature industry, whether it's manufacturing or even parts of tech. So, we shifted from a role of expansion to resilience and optimization. So that was an eye-opener for me. The other thing here is I've been surprised with how beneficial my engineering background has been. I'm a professional petroleum engineer, which can really unlock value in working with our operation teams.

Megan - 03:13: Before we move on, let me just take a quick step back. So today you're with Citation. Can you kind of walk us through your, maybe your educational background and your career to date and how you got to Citation?

Zach - 03:26: I'm an alumnus of Colorado School of Mines. I graduated with a degree in chemical engineering in grad school. So, yeah, not the traditional finance background. I worked for Halliburton as a frac engineer, and then I joined Marathon Oil as a production and operations engineer and got to really work all around the world with them. And then I got my MBA, and as part of that, the world kind of opened up to me, and I took a job with Marathon, kind of an internal move in our corporate business development group where I went from working at a wellhead to working behind a computer and valuing M&A assets for acquisition. And so that, again, kind of really opened my eyes. And then that was right around the same time McKinsey was starting a group at the firm called PAS, which is Petroleum Asset Excellence. So I worked for five years at McKinsey. I really enjoyed my time there, and I joined Citation two years ago as a VP of Finance and Strategic Planning.

Megan - 04:25: That's quite an impressive career. So Citation operates a portfolio of mature assets with a significant reserve life. So from a strategic planning perspective, what are the unique financial challenges of managing aging oil and gas assets, and how do they shape your decision-making?

Zach - 04:44: Managing mature assets is a marathon, not a sprint. You're balancing the benefit of a long reserve life with the reality that operating costs tend to climb as fields age. And, you know, we're working with some very old fields. Still, water handling gets harder, power requirements grow, and the asset grows more complex and not less complex, and all of that in the face of naturally declining production. So from a finance and strategy perspective, that means you have to be disciplined in where you allocate your dollars and how you can intelligently extend asset life. The real challenge is to create longevity and consistency without losing sight of capital efficiency.

Megan - 05:22: And you've highlighted some of the financial complexities of managing aging assets. Closely tied to that are rising operating costs, particularly power, which remain a pressing challenge across the sector. So how do you balance the need to control these costs while still maintaining production efficiency and long-term asset value?

Zach - 05:43: Great question. Power is becoming something that is very important for us in the day-to-day. It's almost like a second barrel. And in some fields, it can make up 30 to 40-plus percent of our operating costs. And to your point, Megan, you can't easily cut power and expect production to stay the same. So it's a delicate balance. And what we try to do selectively is target things like automation, processes like demand curtailment, and other technologies that lower unit operating costs over time. So we try to become more efficient in terms of the electrons that we're pouring into our oil fields. We have capital spend that addresses these cost-savings opportunities. And while they don't really compare well to some of our new drilling activities, in terms of economic returns, they are like an annuity with very low risk. So there's almost no likelihood that they would be failures as projects. We've invested in these lower-return projects with the knowledge that they would be very low risk.

Megan - 06:44: And I'm curious here, but so we're talking about assets. What kind of assets are we talking about? Like, what is their useful life, and how old are they?

Zach - 06:54: So we operate in the oil and gas industry what we call "water floods." So these were once upon a time just normal producing oil and gas assets. And as they age out, the pressure of the reservoirs declines, and it makes it more and more difficult to produce. The production declines. And at some point, you have to go to a secondary recovery mechanism. And in our case, we inject water in a lot of our fields, and that water provides both pressure support. The water will sweep oil to the producing wells. So these assets can be as old as over 100 years old. And probably most of our assets, I'm guessing, were found around the '60s or '70s. So we're talking about 50-plus-year-old assets on average.

Megan - 07:42: And when dealing with mature assets, how do you determine which assets to invest in for optimization versus those to divest or decommission, and what financial frameworks guide these decisions?

Zach - 07:55: Every dollar we spend is a vote, and really kind of a vote in the fields and the future that we believe in. And these frameworks combine hard numbers like NPV and rate of return with softer factors like strategic fit and ESG liabilities. We think about our capital in two ways. We have growth capital, which expands production, and then we have cost-savings capital, which is intended to lower costs and extend the life of our assets. On the growth side, we regularly review our 400-plus units or fields and rank them on a one to four scale based on trailing 12-month cash flow, operating expenses, growth potential, abandonment liability, reserve life, and those kinds of things. We generally like to allocate 80-plus percent of our growth capital to the assets that we rank as ones and twos. So that's how we allocate our growth capital. On the cost-saving side, we focus our capital spend on our fields that benchmark poorly. And as it would happen, a lot of this capital is used to address fields that scored lower in our ranking. So these are the threes and the fours. So we try to balance it and target it in a way that will promote both growth and longevity.

Megan - 09:13: And, of course, market volatility adds another layer of certainty, particularly when you're talking about a commodity where the pricing is out of your control. So how does your finance team approach forecasting and scenario planning for both revenue and operating costs, particularly when it comes to older wells?

Zach - 09:32: Just like any heavy commodity industry, we plan for what's expected and prepare for the extremes. That's the essence of forecasting in oil and gas, and I wish I could predict where the prices will be a year from now, but we run basic scenarios. So we have a base case, a high side, a stress test, and it allows us to kind of design and allocate capital to our portfolio so it can survive and even perform in a range of different environments. One thing our strategic planning team does is they calculate the variable cost at each well, and that's 15,000 wells. So this is a kind of a big data problem. And we do this so that when we get in extreme price environments, like we saw in 2020, we can coordinate with the operations team and let them know what wells we think should be shut in. And sometimes there might be a technical reason why you wouldn't shut it in, but a lot of times, we are able to kind of turn these costs off when the individual NPVs become uneconomic. So, you know, so this tight surveillance of our asset performance has allowed us to have positive cash flow in each of the quarters in 2020, which is pretty incredible considering where we were with oil prices in 2020 and also given our cost structure where we're kind of a high-operating expense company.

Megan - 10:46: And maybe you just touched on this a bit, but from your vantage point, how do you integrate operational data from the field, like declining production trends, into your high-level financial strategy?

Zach - 10:59: Good question. I mean, hard decline curves aren't just geology. They are strategy, and I'll use a Lewis Carroll quote here that I think is just very relevant to the upstream oil and gas and energy industry. In our business, you have to run just to stay in the same place. So every day, we're translating field-level data, how wells are performing, where production is falling, into boardroom-level financial decisions. And that's the bridge finance can provide, taking complex operational realities and turning them into actionable plans. And when you can do that well, you stop being just a numbers person and start being a real partner in shaping the business.

Megan - 11:37: And that operational lens naturally brings us to technology, which can make or break efficiency anywhere, but particularly in older fields. So how do you evaluate the ROI of technological upgrades, and how do finance leaders ensure these investments make sense?

Zach - 11:55: It's really easy to get excited about shiny new tools, but the hard part is proving that they can create value. We look at ROI through a few lenses when it comes to new technology: payback periods, scalability, cost savings, reliability, how will it scale across fields, what's the cash return. One of the other concerns we have about integrating new technology is that we don't just operate old assets. We have old technologies. And so every new technology strains our asset teams. It strains our IT teams and any number of other people in our organization. So, and we are lean, so the value prop from new technology has to be clear. And to be frank, that puts us in the category of a slow adapter or kind of a late entrant. But my job and our finance team's job is a unique role as translators. So we help engineers and operators who are excited about innovation and new ideas to understand which ideas can really compound value and which ones probably won't. And I think this discipline makes sure that the technology is an accelerator and not just an expense.

Megan - 13:00: And technology is one lever, but so is inorganic growth. Given Citation's history of acquisitions, how do you weigh the financial attractiveness of acquiring aging assets given the rise in production costs and potential long-term liabilities?

Zach - 13:16: What I've learned is that the best deal isn't always the cheapest barrel in the ground. When we look at acquiring mature assets, we obviously evaluate the discounted cash flows from these assets, but that won't tell you the whole story of how that asset might fit with our specialties. We are really trying to break down in what area we can add value. So, can we lower costs? Can we drill new wells? Can we extend the field of life in some other way? Can we manage liabilities more effectively? Because if the answer is yes, then those assets are very attractive, even if they're old, and we operate some old assets. But if the answer is no, then it's just a liability waiting to show up on your balance sheet, and we're happy to let someone else pay for that.

Megan - 14:01: And beyond financial returns, today's investment decisions are increasingly shaped by ESG considerations. So from a leadership perspective, how do you weigh ESG considerations against immediate operational costs?

Zach - 14:16: I think ESG, and specifically, the "E" in ESG, is often framed as a cost center, but the reality is that for us, it's a license to operate. The energy industry is under a lot of pressure to reduce emissions, manage water better, integrate renewables, and those initiatives cost money. As I've mentioned before, at Citation, we are a company that acquires assets and kind of runs them through their full life. And as a result, we are indistinguishable from the communities in which we work. And let me say that in a different way: we are not going to buy an asset and sell it five years later for a profit. We are going to buy an asset, we're going to develop it, and we're going to extract as much value out of it as we can. And, again, the result of that is we are our communities, and our interests are fully aligned with everyone in our community. So when we win, they win, and we strive to be a safe and clean operator. So we look at ESG not just as an expense, but as an investment in durability. If you only optimize for short-term cycles, such as this quarter's cost, we miss the bigger picture of protecting enterprise value, protecting your reputation, and keeping your community safe and clean.

Megan - 15:22: And stepping back from oil and gas specifically, your experience with mature assets has broader implications. So for finance leaders across industries, what lessons have you learned about maintaining profitability and driving value from operations that may no longer be growth engines?

Zach - 15:41: One of the broader lessons I've taken is that every industry eventually has to reckon with declining or aging assets, and not every oil and gas company wants to do this. But this is our specialty, and this is where we excel. You know? And I'm guessing the playbook is the same whether you're in manufacturing, telecom, or tech infrastructure. The job is to extend asset life intelligently, focus on efficiency, and have the discipline to exit things when they no longer generate value. So that's how we sustain profitability when growth isn't the easy answer anymore.

Megan - 16:14: And finally, as you look ahead, what trends in energy finance, aging asset management, or operational cost optimization do you think will define the next three to five years?

Zach - 16:26: The role of energy finance is getting more complex, and we see power and LOE inflation continue, more digital integration, and more likely to be scrutiny on environmental performance and emissions. And probably most importantly, AI is gonna play an important role in every part of our business, starting at the reservoir and really kind of ending in the front office. The more financial professionals can understand their own operations, the more they can shape the future of those operations. I think one trend in upstream oil and gas is that we're gonna see M&A continue to play a big role as companies trade portfolios to fit their strengths and the oil and gas industry continues to consolidate. So for finance leaders, that means agility is critical and being able to balance short-term survival with long-term transformation. And the winners are those who are comfortable with both spreadsheets and strategies, both data science and leadership. So that's what I think the next few years has in store for us.

Megan - 17:24: And one quick last question. But given the changing skill sets required within finance, how are you preparing yourself and maybe your team for what's to come in the future?

Zach - 17:36: Good question. I think the CFO of the future will be less about spreadsheets and more about strategy. I mean, you can see the power that AI has brought to the ability to analyze any part of our business. And so, so thinking strategically and being able to find pockets of value where no one else sees them will be, I think, important. The basics—the capital structure, reporting controls—that won't go away. But what's really changing is the expectation that CFOs and finance business leaders are architects of the business and individuals who can get into the weeds with their asset base. I think my personal opinion is that finance leaders with the most knowledge of their asset base will have a distinct advantage. They'll need to be strategists who can shape growth, technologists who can leverage digital tools, and storytellers who can translate complexity into clarity for CEOs and boards, employees, and investors. So the finance leader of tomorrow kind of sits at an intersection of numbers, technology, and culture, and I think it's an exciting place to be, and I'm looking forward to it.

Megan - 18:42: Couldn't agree more. Zach, thank you so much for being my guest today.

Zach - 18:46: Thank you.

Megan - 18:46: I really enjoyed speaking with you, and thanks for finding the time to be here with us today to share your experience and knowledge, and I wish you all the best. And to our listeners, please tune in next week. And until then, take care.