Oil has been very good to university endowments in Texas.
It was so good in the year through June 30 that the University of Texas saw the value of its endowment reach $31 billion, surpassing Yale to become the second-largest endowment in U.S. higher education, according to data compiled by Bloomberg.
The endowment was fueled by mineral rights from land it controls in the Permian Basin. It’s an area bigger than Delaware that has emerged in the past decade as the world’s fastest growing oil-producing region due to advances in hydraulic fracturing, or fracking. The state system shares the mineral rights revenue with Texas A&M University, which saw its endowment value surge to $13.5 billion.
The boom may recede as the price of a barrel of oil has tumbled by 40 percent from a high this year of $76 in October. Still, endowment performance out of the Lone Star state is a testament to the influence of the Permian. A small school outside of Dallas with a big energy bet produced one of the best returns in higher education in fiscal 2018. Most universities began reporting fiscal 2018 endowment investment returns in the fall.
Low Risk
Mineral rights, which can be split from holdings of the surface property, convey ownership of the underground gas, oil, and other natural resources. They are a common asset at Texas colleges. The two public systems receive royalties from land the state designates for higher education while other schools are often given mineral rights by donors.Mineral rights are also seen as a relatively low-risk way to get exposure to energy and generate income compared with buying shares in drillers or taking stakes through private equity funds.
More Wells
“The oil has always been there,” said Mark Houser, chief executive officer of University Lands, the state system’s arm that leases and oversees the companies drilling on the properties. “Really it’s the technology that’s enabled us to open up more wells.”Royalties flow into a fund that is controlled by University of Texas/Texas A&M Investment Management Co., which invests in stocks, bonds, and alternative assets. About 5 percent a year is paid out to support the state schools.
While Yale University now trails Texas with an endowment of $29.4 billion, it’s still by one measure richer because it has about a third of the undergraduate student body of the flagship school to support. The UT system has 235,000 students across all of its campuses to more than 12,000 at Yale.
Other schools that have benefited include Texas Christian University. The school in Fort Worth has 10 percent of its $1.6 billion endowment allocated to energy, with more than two-thirds in mineral rights it received from donors, said James Hille, the investing chief.
Abilene Christian University, a small private college west of Dallas, committed a quarter of its $450 million endowment to energy, including a big bet on the Permian region. The fund gained 15.8 percent in fiscal 2018, better than most wealthy U.S. colleges and eking past Bowdoin College’s 15.7 percent return.
Lifted Limit
The university had so much conviction in the investment it lifted its limit on how much the endowment may own in one company, said Jack Rich, the chief investment officer. A 3 percent commitment was increased to 11 percent this year and generated a 130 percent gain when some shares were sold, he said.“That’s off the rails,” said Rich, who’s worked for the university’s administration for 28 years, creating an investment office about a decade ago. “We took some risk there.”
It’s rare for school funds to hold more than single-digit allocations to energy, said Fund Evaluation’s Busken. Many endowments and foundations have cut oil and gas under pressure to divest from fossil fuels.
Rich said Abilene Christian is diversifying into wind, solar, and other sustainable energy producers. It’s also holding a position in Texas Pacific, even as the share price has tumbled with oil prices.
“Our edge is our willingness to buy into what we know, and that’s the energy market,” Rich said.
