The University of Texas Investment Management Company's CEO Bruce Zimmerman said the move by the UT System Board of Regents to sell reserves of oil and gas in West Texas at fixed prices will allow the regents to reinvest in more diverse assets.
The regents voted last week to authorize the pursuit of such a transaction, called a forward contract, which would involve the lease of UT System lands for oil and gas drilling at locked-in prices for about 10 years. The system owns 2.1 million acres of land in West Texas, of which 1.4 million are currently leased for drilling. Royalties from the drilling are deposited in the Permanent University Fund.
"The System is essentially reducing its risk exposure through diversifying its asset base," Zimmerman said.
Zimmerman said the sale could bring in about $1 billion at the time it is made but cautioned that a transaction may not occur at all. He said the UT System is essentially conducting a negotiated auction, but he could not give the names of potential partners.
"Right now, you're dependent on a single commodity," he said in reference to the oil reserves on UT lands. "By monetizing it, you are reducing your risk, your dependency on that single asset. Now, if it goes up, you would have liked to hold on to that asset."
The system would be pulling potential money from oil and gas reserves and spreading it out in assets such as real estate, bonds and investment funds.
Zimmerman said the second benefit of the deal would be an increase in the Permanent University Fund's current payout. Currently, close to 5 percent of the fund is paid into the Available University Fund every year. Two-thirds of the available funds go to the UT System, while the Texas A&M System receives the remaining third.
"We're not increasing or decreasing our assets," he said. "We're just changing the composition and bringing it forward. That $50 million, the first year, over time would have been spent anyway."
Revenues from the forward contract would not immediately be distributed to Texas universities but would first be deposited in the Permanent University Fund.
"Whatever came over to the campus, it would be used in ways that are capital assets on campus," UT President William Powers said. "It wouldn't just be used to balance the budget."
Powers said the funds would not be spent on construction but would go toward programs on the verge of becoming the best in the country. He cited the School of Undergraduate Studies, which is already fully funded.
UT budget director Mary Knight said money from the Available University Fund is generally used for scholarships, research funds and special programs on campus.
"I don't know the details, but if these estimates are correct, that would be a significant addition to the budget," Knight said.
Ehud Ronn, a finance professor, said in an e-mail that when commodity prices reach record highs, owners of oil-rich lands often decide to eliminate the riskiness of cash flows by locking in prices. But by hedging, or avoiding risk, the owner forgoes any benefits should prices rise again.
Ronn said hedging is used by private and public institutions but that "in the private sector, people are less concerned about the immediacy of the funds than locking in prices."
Ronn said the UT System's plan aligns with current projections of future oil prices. But the risk remains that prices could continue to rise and the system could lose out on those royalties.
Be the first to comment on this article!