Oil Investments Are Expected to Make this Texas University the Nation’s Wealthiest School

The University of Texas at Austin (UT), just a couple of hours up the road from our headquarters in San Antonio, may soon unseat Harvard as the wealthiest school in the U.S. How has it managed to do this? In a word: Oil.

At a time when large sovereign wealth funds are divesting from fossil fuels and ESG (environmental, social and corporate goverance) investing has gone mainstream, the UT System has been the longtime owner and manager of 2.1 million acres of mineral-rich land, scattered across West Texas, that it leases out to as many as 250 producers, including ConocoPhillips.

Thanks to higher oil prices, the mineral rights to the land generate roughly $6 million every day, according to Bloomberg.

The UT System’s decision to continue participating in oil is in keeping with Texas’s close ties to the fossil fuels industry. The state produces more oil and gas (and wind power) than any other, a fact that policymakers are eager to protect. This week, Texas moved to restrict state pension funds from investing in BlackRock, UBS Group, Credit Suisse and a number of other financial institutions that have been found to be “hostile” toward the energy sector.

But it’s more than just tradition. UT’s oil investments have been incredibly profitable and, by most accounts, will continue to be so as long as the energy crisis deepens and inflationary pressures keep prices elevated. The S&P 500 Energy Index is by far the top performing sector for the year, up nearly 50%, compared to the broader market, which is off by 12%.

A New Cycle of Outperformance?

Looking ahead, energy stocks appear to be setting up for a new cycle of outperformance relative to the market. Take a look at the chart below, which shows the long-term ratio between the energy index and S&P 500. Technically, this may be the most attractive time to invest in energy since at least the beginning of the century.

Warren Buffett seems to agree. Last week, Berkshire Hathaway received regulatory approval to buy up to half of Houston-based Occidental Petroleum (OXY).

The disruptions of the past two years are believed to have triggered a readjustment in the energy market. In a just-released report, Deloitte projects that oil and gas producers could report the highest-ever free cash flow (FCF), as much as $1.4 trillion, in 2022. The industry could also become debt-free by 2024.

Although oil prices in 2022 have been equivalent to those in 2013 and 2014, cash flows are currently three times higher thanks to capital expenditure discipline after years of underinvestment, Deloitte analysts say. U.S. shale producers, which generated negative cash flows in nine out of the last 10 years, are expected to report record FCF of $600 billion.

This comes as the U.S. is set to export a record amount of crude oil this year and next as the country captures market share away from Russia. Since Congress lifted the 40-year-old oil export ban in 2015, weekly exports have steadily risen above 4 million barrels a day, but earlier this month, exports exceeded 5 million barrels for the first time. According to Bloomberg, U.S. suppliers will likely be able to hold on to the increased market share since producers in other regions, including those in the North Sea and West Africa, have not been growing output as rapidly as American companies have.

California Bans Gas-Powered Vehicles by 2035. Will the Infrastructure Be Ready by Then?

The backdrop to all of this, of course, is the expansion of ESG-minded investing and global financing of alternative fuels and renewable energy sources. This week, California became the first state to approve a ban on the sale of new gas-powered vehicles by 2035 in favor of electric vehicles (EVs). This is a huge opportunity, as investment in the state’s notoriously spotty power grid will need to increase significantly.

New, more reliable EV charging stations will also need to be installed. Earlier this month, J.D. Power announced that Americans’ satisfaction in charging infrastructure is declining due to a growing number of “inadequate” and “non-functioning stations.” 

“This lack of progress points to the need for improvement as EVs gain wider consumer acceptance because the shortage of public charging availability is the number one reason vehicle shoppers reject EVs,” the report reads.

Airlines and Shipping Companies Seeking Alternative Fuels

The airlines and container shipping industries are also seeking ways to achieve net-zero carbon emissions by 2050. One method being used by airlines is sustainable aviation fuel (SAF), which reportedly reduces CO2 emissions by as much as 80%. The liquid fuel is normally produced from a number of sources, including waste oil and fats, municipal waste and non-food crops.

SAF is currently much more expensive to make than traditional jet fuel, but several companies and groups are leading efforts to scale up the technology. Boeing is establishing a facility in Japan to begin researching and developing SAF, while World Energy, a Boston-based low-carbon solutions provider, is planning to convert a refinery in Houston to an SAF plant. Earlier this month, Alaska Airlines announced it had finalized an agreement to buy 185 million gallons of SAF from biofuel company Gevo over five years starting in 2026. Alaska also has announced a collaboration between Microsoft and start-up firm Twelve to advance production of E-Jet, an even more sustainable fuel that’s made from carbon dioxide.

As for shipping, wind propulsion is being touted as the “most impactful emissions reduction technology.” Today, 21 large ocean-going vessels already have wind-assist systems installed, according to the International Windship Association (IWSA), and by the end of 2023, this number could jump to nearly 50. Some of the biggest names in maritime shipping are involved in investing millions of dollars into wind propulsion technology, including Cargill, Maersk and Mitsui. The IWSA calls the 2020s the “Decade of Wind Propulsion.”

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Energy and Natural Resources

Strengths

  • The best performing commodity for the week was uranium, up 13.22%, as proxied by the Sprott Physical Uranium Trust, on news that Japan is eyeing a dramatic shift back to nuclear power after more than a decade since the Fukushima meltdown. Prime Minister Fumio Kishida noted that nuclear power and renewables are essential to a green economy. In other news, Germany’s natural gas storage facilities surpassed a fill level of more than 75% this month, reports CNBC, two weeks ahead of schedule, as Europe’s largest economy scrambles to prepare for the coming winter. The latest data compiled by industry group Gas Infrastructure Europe shows Germany’s gas storage facilities at slightly over 77% full. Chancellor Olaf Scholz’s government initially planned for gas storage levels to reach 75% by September 1, the article explains. The next federally mandated targets are 85% by October 1 and 95% by November 1. 
  • The world’s largest copper market is tightening as a summer power crunch in parts of China disrupts production at a time of already-low inventories. Both the premium on imported cargoes over the LME spot rate, and the spread between local spot and futures prices, expanded last week to the widest levels since the final quarter of 2021, according to researcher Shanghai Metals Market. 
  • Coal prices remain elevated, met coal being up 11% this week and higher by 23% this month. Thermal coal is up 3% this week and up 2% this month, as this is a seasonally strong demand period for the commodity (monsoons ending in India and maintenance periods running over in China). Industry expectations are building that China may relax its import ban on Australian coal after no import volumes from Atlantic HV?coal in the past few months, indicating some buyers think they’ll be able to buy Australian coal soon. Heatwaves in China, coupled with decreasing inventory levels, placed upward pressure on prices last week.

Weaknesses

  • The worst performing commodity for the week was lead, down 3.22%, on recent easing of power rationing which is expected to increase supply. Despite a steady flow of supply closure headlines in zinc and aluminum, the prices of both metals are down on the week. Zinc prices initially jumped more than 6% intraday on Tuesday up to $3,800 per ton but nearly erased all these gains before the market closed for the day and have now sunk back toward $3,500 per ton. To some degree, this can potentially be explained by buy-the-rumor, sell-the-fact profit taking after zinc prices were likely already pricing in the risk of this supply headline – zinc was up nearly 30% off its July low at the end of last week versus 14% in copper and 8% in aluminum.
  • The Indian government has increased taxes of fuel exports to INR 2/liter from zero on jet fuel and by INR 2/liter to INR 7 on diesel. The government also slashed a windfall tax on locally produced crude oil, Reuters reported, citing government notifications. Tax on domestically produced crude oil was cut to INR 13k per ton from INR 17.8k per ton.
  • U.S. permitting activity decreased substantially in July with 1,145 approved permits compared to 1,415 permits in June. On a month-over-month basis (July versus June), the total approved permit count for horizontal wells decreased 270 permits to 1,145 permits. Private operators received 558 approved permits compared to 587 approved permits for public operators in July, which compares to private operators with 529 permits and public operators with 661 permits in June.

Opportunities

  • Deloitte LLP noted this week that U.S. shale producers are on course to make nearly $200 billion this year, perhaps enough to make the industry debt-free by 2024. The report also highlights that this cycle is being met with much more capital discipline. Global spending is about 60% less than spending in 2014. This bodes well for paying down debt, raising dividends, and stock buybacks in the future.
  • Ford announced the cutting of 3,000 jobs in a move to shift $50 billion in spending toward developing its electric vehicle (EV) production capacity. Last year Ford produced 64,000 EVs but plans to tool up to having an annual capacity of 2 million EVs by the end of 2026. With tax incentives authorized to produce EVs from domestic sources, and certain trade partners by the recent climate legislation, investors should find domestic natural resource investments favored over imports. Panasonic, which already jointly operates a battery factory with Tesla in Nevada, announced it is planning on building an additional $4 billion battery plant in the U.S., perhaps Oklahoma.
  • Natural gas futures in the U.S. jumped to a new 14-year high as European prices surged on Russia’s move to shut a major pipeline, stoking speculation that demand for American exports of the heating and power-plant fuel will soar. U.S. gas climbed as much as 6.9% to $9.982 per million British thermal units on the New York Mercantile Exchange. In Europe, benchmark gas futures rose as much as 20%, driving electricity prices to fresh records. It is likely that natural gas demand will remain strong despite the pull back in crude oil prices.

Threats

  • Nickel was in the spotlight this week as Indonesian president Joko Widodo proposed a tax on exports of the metal. Indonesia currently produces 30% of the world’s nickel, but much of it is in the form of Nickel Pig Iron and ferronickel, which are exported abroad for smelting and refining. It is hoped that export taxes on NPI and ferronickel could help move Indonesia up this value chain. Nickel, which is primarily used in stainless steel production, is rapidly expanding its end use, as each new electric vehicle requires about 50kg of the metal. Despite this announcement, nickel dropped 5.9% on the week as inventories of NPI at ports in China remain high amid weakening demand from Chinese steel mills.
  • According to JPMorgan, steel prices in the U.S. have continued to fall from their peak with HRC prices now around $771 per ton versus $1,780 per ton at the end of September. The bank thinks prices will continue to move slightly lower over the next several months.  
  • Carbon prices have sharply increased, rising to an all-time high because of increased cooling demand in Europe. S&P reported that lower auction volumes in August and September are contributing to this rise. The sharp increase in prices is likely to accelerate the idling of marginal steel mills (or at least those will little-to-no hedges in place) as margins continue to be under pressure.  

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Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was EOS, rising 23.01%.
  • The main clearinghouse for the U.S. stock market has switched on a settlement system built on blockchain, calling it a “milestone achievement” for adopting digital technologies in markets. Depository Trust & Clearing Corp. said on Monday that its “Project Ion” platform is now processing around 100,000 bilateral equity transactions a day in parallel with its existing settlement system, writes Bloomberg. 
  • Dallas Cowboys quarterback Dak Prescott has signed a multiyear endorsement deal with cryptocurrency firm Blockchain.com as the crypto industry boosts its presence in sports to lure more users. CEO Peter Smith said pro football is going to be crucial for the crypto industry as platforms battle for users, Bloomberg explains.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was FLOW, down 15.10%.
  • Bitcoin nursed a four-day drop of about 10%, held back by a bout of risk aversion in global markets on jitters over tightening Federal Reserve monetary policy. Bitcoin fell 2.7% on Monday as the global equity market rebound starts to crack in part because of the Fed’s commitment to raise rates and drain liquidity, writes Bloomberg. 
  • Cryptocurrencies mirrored global markets and declines after Jerome Powell warned against prematurely loosening policy with Bitcoin settling into the lower end of the narrow range that it has traded in the past two weeks. As reported by Bloomberg, Bitcoin slumped as much as 4.9%, putting it on pace for a second consecutive weekly loss.

Opportunities

  • Hacks and bankruptcies continue to roil the digital-asset industry. But these setbacks have become a boon for makers of hardware wallets who have seen their sales spike as customers rush to protect their crypto assets, writes Bloomberg. French startup Ledger saw its day-over-day sales balloon 400% in the 24 hours after a $5.2 million hack involving digital wallets based on the Solana blockchain earlier this month.
  • Former SEC Chairman Jay Clayton has joined venture firm Electric Capital as an advisor, part of a growing wave of ex-regulators flocking to the crypto space as the industry faces increasing scrutiny. Kevin Warsh, a former member of the Federal Reserve Board of Governors was also named as an advisor, writes Bloomberg. 
  • Cryptocurrency miners are accelerating their push to expand in Texas far beyond what authorities had initially expected, reports Bloomberg, threatening to send the state’s electricity use skyrocketing. Enough miners have applied to connect to Texas’ power grid to use up to 33 gigawatts of electricity. The surging interest underscores how appealing Texas remains to crypto miners, even as the value of Bitcoin has plunged more than 50% in the past year, the article continues. 

Threats

  • A former money manager for Celsius Network deceived the company about his investing abilities and lost or robbed tens of millions of dollars in assets, the bankrupt crypto lender alleged in a lawsuit Tuesday. Celsius alleges Keyfi Inc founder Jason Stone lied about his investing prowess and was incompetent in managing Celsius assets, writes Bloomberg. The crypto lender also accused Stone of outright theft.
  • Tornado Cash, a cryptocurrency mixer that was recently slapped with U.S. sanctions, was the preferred tool for laundering illicit proceeds from NFT scams prior to the ban, according to blockchain analytics firm Elliptic Enterprises. Services offered by platforms like Tornado Cash can be used to mask transactions by mixing tokens from different sources before transferring them to the ultimate recipients, according to Bloomberg. 
  • Afghanistan’s central bank imposed a nationwide ban on cryptocurrencies this month and the Taliban regime has arrested several dealers who defied orders to stop trading digital tokes, according to a senior police official. The crackdown comes after some Afghans turned to cryptocurrencies to preserve their wealth and keep it out of the Taliban’s reach, writes Bloomberg.
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Gold Market

This week gold futures closed at $1,749.90, down $13.00 per ounce, or 0.74%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 1.46%. The S&P/TSX Venture Index came in off 0.61%. The U.S. Trade-Weighted Dollar rose 0.59%.

Date Event Survey Actual– Prior
Aug-23 New Home Sales 575K 511k 585K
Aug-24 Durable Goods Orders 0.8% 0.0% 2.3%
Aug-25 Hong Kong Exports YoY -4.8 -8.9% -6.4%
Aug-25 Initial Jobless Claims 252k 243k 245k
Aug-25 GDP Annualized QoQ -0.7% -0.6% -0.9%
Aug-30 Germany CPI YoY 7.8% 7.5%
Aug-30 Conf. Board Consumer Confidence 97.5 95.7
Aug-31 Eurozone CPI Core YoY 4.0% 4.0%
Aug-31 ADP Employment Change 319K 128k
Aug-31 Caixin China PMI Mfg 50.1 50.4
Sep-1 Initial Jobless Claims 250k 243k
Sep-1 ISM Manufacturing 52.1 52.8
Sep-2 Change in Nonfarm Payrolls 300k 528k
Sep-2 Durable Goods Orders 0.0%

Strengths

  • The best performing precious metal for the week was gold, but still down 0.74%. Gold steadied after a six-day run of losses as financial markets remained on edge ahead of a pivotal annual gathering of central bankers at Jackson Hole. Bullion rose as much as 0.4% as manufacturing surveys showed France unexpectedly joining Germany in recording a decline in factory activity. A recession in the 19-member Eurozone is now more likely than not as energy costs spike following Russia’s invasion of Ukraine, according to analysts surveyed by Bloomberg. Friday’s more hawkish tone from the Fed’s Jackson Hole meeting took the edge off of a relatively good week in gold.
  • Exchange-traded funds (ETFs) added 69,512 troy ounces of gold to their holdings in the last trading session, bringing this year’s net purchases to 2.59 million ounces, according to Bloomberg. The purchases were equivalent to $121.4 million at the previous spot price. Total gold held by ETFs rose 2.6% this year to 100.4 million ounces.
  • According to Canaccord Genuity, with a large valuation gap between the larger and smaller royalty companies (1.8x NAV average for the senior royalty companies versus 1.0x for the intermediate/juniors), the group expects more consolidation to come. The benefit here would be better diversification, scale, and lower cost of capital.

Weaknesses

  • The worst performing precious metal for the week was platinum, down 3.90%, as bears put on more shorts for the week. Wheaton Precious Metals announced that it has agreed to terminate its silver stream on Glencore’s Yauliyacu mine in Peru. As compensation, Wheaton will receive an upfront cash payment of $150 million less net proceeds already received from the stream year-to-date in 2022. Management notes that the stream termination is consistent with its core principle of working with its partners, and that the company looks forward to maintaining a strong partnership with Glencore.
  • Sibanye Stillwater had a weak quarter, with a 6% EBITDA/EPS miss and negative developments in its ongoing South African labor negotiation. However, the company did maintain guidance.
  • Shares of Ramelius Resources slid over 7% this week after the company revealed a hit of up to $84.7 million on its full-year results to be released in one week. The gold miner announced that it would recognize an impairment in the value of its Edna May operation worth $90 million – $95 million. The impairment is being explained due to high input costs being experienced throughout the industry.

Opportunities

  • One of the world’s largest platinum group metal refineries Heraeus Metals Germany GmbH & Co said output at one of its refineries will be constrained due to a supplier of a crucial chemical to the extraction process declaring force majeure. Palladium prices jumped over 5% on the news. Heraeus noted this is a short-term issue for one of its refineries in Germany, but delays could be drawn out until November 30. It is not known to what extent the chemical reagent may be restrained or whether other refineries could be impacted.
  • First Majestic Silver climbed as much as 6.3%, for its biggest intraday gain since August 4, after a drilling project in Nevada returned high grades of gold. The exploration results “validate our thesis” that areas between the company’s SSX and Smith mines are favorable “for new, near-mine gold discoveries,” president and CEO Keith Neumeyer said in a press release.
  • According to Raymond James, production levels generally increased in the second quarter after a weak first quarter. Gold production grew by an average of 4% and copper production by 19% quarter-over-quarter for producers under coverage. Despite higher production levels, costs remained elevated as input pricing continued to rise through the early part of the second quarter. Gold and copper cash costs increased by an average of 12% sequentially in the second quarter.

Threats

  • An airstrip in a remote jungle, built by the Brazilian government to provide healthcare to the Indigenous people in the region, has been taken over by illegal miners. The miners seized the opportunity to fly in small planes with mining supplies into a region with no roads. Now that they have established their operations, they watch over the airport, controlling all traffic in and out of the landing site. If a plane approaches that they do not recognize, the miners spread fuel canisters across the runway, making it impossible for the government to land. The success of the operation has led to the illegal miners building four more nearby airstrips on the protected land of the Yanomami people, reports the New York Times.
  • Russian miners are leading the push into yuan-bond issuance on the local market as international sanctions deepen the nation’s economic ties with China. Polyus PJSC, Russia’s biggest gold miner, will collect offers for 3.5 billion yuan ($511 million) of five-year bonds, at a yield of 4.2% or lower, according to people familiar with the matter who asked not to be identified because the details aren’t public.
  • The panic that gripped the diamond world this year is starting to unwind as sanctioned Russian mining giant Alrosa PJSC has quietly revived exports to near pre-war levels, writes Bloomberg. Alrosa accounts for about a third of global rough-diamond supply, and the $80 billion industry was thrown into turmoil as cutters, polishers and traders hunted for ways to keep buying from Russia while their banks couldn’t or wouldn’t finance payments. The sudden shortage of stones sent diamond prices surging, the article explains, especially for the smaller and cheaper gems that Alrosa specializes in. Now, after months of paralysis when it was hit with U.S. sanctions, Alrosa is back selling more than $250 million of diamonds a month, with sales currently only about $50 to $100 million a month below pre-war levels, according to people familiar with the matter.

You can read the full article at https://www.usfunds.com/resource/oil-investments-are-expected-to-make-this-texas-university-the-nations-wealthiest-school/

 

Author: Frank Holmes
Date Posted: August 26, 2022