University Lands FY20 Annual Report

University Lands FY20 Annual Report

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Fiscal Year 2020 Annual Report

Table of Contents

AT-A-GLANCE

1.3MM Acres Leased for Mineral Development

24,000 Oil & Gas Wells Drilled to-Date

79,000 Acres of Renewable Energy Leases

PUF Lands

2MM Acres of Grazing Lands

20,000 Miles of Pipeline & Powerline Easements

10,000 Producing Oil & Gas Wells

University Lands (UL) manages the surface and mineral interests of 2.1 million acres of land across 19 counties in West Texas for the benefit of the Permanent University Fund (PUF). The PUF is the largest public university endowment in the U.S. and benefits more than 20 educational and health institutions across both The University of Texas System and The Texas A&M University System.

BUSINESS LINES

Oil and Gas Resources

Solar and Wind

Water Resources and Logistics

Other Surface Activities

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At-A-Glance

HISTORY

Mirabeau B. Lamar urges the Congress of the Republic of Texas to establish the foundation for a vast system of higher education 1838

1839 Fifty leagues (220,000 acres) of land are set aside by Congress for the establishment and endowment of a university

1876 The State of Texas Constitution appropriates 1 million acres of land in West Texas to the Permanent University Fund (PUF). These lands would become known as PUF Lands 1883

An additional 1 million acres are added to PUF Lands

Oil is discovered at the Santa Rita #1 well on PUF Lands in Reagan County, and the PUF endowment receives its first royalty check for $516.53 1923

1929 The Board for Lease of University Lands is created

2009 The Permian Basin shale boom begins

2019 University Lands records the highest production of oil and gas from PUF Lands in its history

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Fiscal Year 2020 Annual Report

History

TABLE OF CONTENTS

02 UL At-A-Glance 03 History 06 FY20 Highlights 07 FY20 Performance 08 CEO & Board Chair Message

10 Governance 12 Management 14 Mission & Goals 16 Financials 18 Oil & Gas Mineral Management 22 Surface Management 28 Environmental Stewardship 38 The PUF Fund Explained

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Table of Contents

FY20 HIGHLIGHTS

REVENUE Gross revenues totaled $849 million with PUF revenue coming in at $771 million and AUF revenue at $78 million. EXPENSES Annual expenses were 14% below budget at $22.3 million and represented 2.6% of gross revenue or $0.96 per barrel of equivalent production unit cost. PRODUCTION Production rates averaged around 290,000 gross barrels of oil equivalent (BOE) per day, down about 1% year over year. UL’s mineral royalty averaged 22.5% for both oil & gas, equaling a cumulative net royalty volume of 23 million BOE. ASSET VALUE Proved reserves were down 5% year-over-year primarily due to economic conditions, which have resulted in development delays and adjustments to commodity price projections. On a price neutral basis, the value-per-acre of proved reserves is up 11% year-over-year. VALUE CREATION Minerals: Five oil & gas development agreements were negotiated adding approximately 1 million lateral feet in increased potential drilling commitments. UL worked with several companies as the industry continued its period of consolidation and restructuring to protect and enhance our agreements. Surface: Surface activities included the execution of over 926 contracts which added over $78 million in revenue to the AUF. PUF surface activities include many ongoing environmentally-focused and conservation-minded projects such as water management, emissions and flare monitoring, invasive brush control, livestock and wildlife management and oilfield lease restoration. ENVIRONMENT UL performed 52 infrared camera inspections and 1,575 oil & gas inspections. UL’s Lease Evaluation team reviewed and terminated leases that returned 3,800 acres to inventory, and 155 unproductive oil & gas wells were plugged with the surrounding areas remediated and returned to pastureland. WATER Water revenue was up 41% year-over-year partially due to the introduction of a groundwater import/export fee which was established as part of the continued focus of water management and movement on PUF lands. Operators report 635 water well meter readings to UL monthly.

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FY20 Highlights

FY19 PERFORMANCE 20

GROSS REVENUE

$849M

NET TOTAL RESOURCE

$78M Available University Fund Revenue (Surface)

$771M Permanent University Fund Revenue (Minerals)

2,095 MMBOE

237 MMBOE Net Proved Reserves

EXPENSES

$22M

LATERAL FEET DRILLED 1.65MM

2.6% of Gross Revenue

$.96 Expenses/BOE

190 Wells Put-on-Production

NET ROYALTY PRODUCTION

23,000 MBOE

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Fiscal Year 2020 Annual Report

Table of Contents

CEO & BOARD CHAIR MESSAGE

In 1839, a visionary investment was made when the Congress of the Republic of Texas set aside 50 leagues (eventually becoming 2.1 million acres) of West Texas land to establish an endowment and university. It is an intriguing story that carries through to the discovery of oil on the land in 1923 and the university systems borne of its fortunes. Today that endowment, aptly named the Permanent University Fund (PUF), supports Texas’ two preeminent university systems — The University of Texas and Texas A&M — and is the nation’s largest public university endowment. The PUF has proven to be a vital resource in helping more than 20 educational and health institutions achieve academic and research excellence. University Lands is the managing entity for the 2.1 million acres of West Texas land that fund that endowment. Our success results in funding that supports first-class state universities and medical facilities. As a native Texan and proud Aggie, it is personally rewarding to responsibly steward the natural resources of this great asset and generate revenue for the benefit of Texans. At the start of fiscal year 2020, which ran September 1, 2019, to August 31, 2020, we were coming off a record year for both oil and surface revenue. But the softening commodity prices and lack of access to capital for the upstream oil and gas industry—our primary revenue driver—caused concern early in FY 2020. In April and May, when the significant global economic impact of COVID-19 on energy demand and subsequent oil and natural gas prices became apparent, we worked closely with our oil and gas operators to slow activity, reducing oil production by 18% in one month. This provided much-needed activity relief to these operators and minimized production during a period of significantly lower oil prices. Even with the drastic change in market conditions that caused oil prices to be ~33% lower than last year, we were able to generate ~$850 million in revenue. As the energy markets normalized through the summer, the industry showed its resiliency and production was restored back to almost pre-COVID levels. After reassessing the energy markets and the potential for the PUF Lands going forward, we came to the following conclusions: • Worldwide energy demand will continue to grow, and oil and gas will be key to ensuring a worldwide supply of low-cost energy for years to come and the Permian Basin will remain one of the world’s most important oil and gas resources. • The available supply of renewable energy and its market share of energy demand will continue to grow globally. With its wind and solar conditions and existing power infrastructure, West Texas will provide an extremely attractive growth opportunity for renewables development. • All forms of energy development will be required to meet increasingly higher environmental stewardship and accountability standards. • The PUF Lands are well positioned to lead responsible energy development for a very long time. While there is much uncertainty as to exactly what “economic recovery” will look like over the next several years, University Lands is strategically working to ensure the energy industry increases its investment in developing the vast resources of the PUF lands, including oil and gas and renewable energy. We also will continue to lead the implementation of responsible water and grazing practices in West Texas. We are thankful that Texas is blessed with natural energy resources from the PUF Lands that will provide a long-term source of low-cost energy for the state, the country, and the world. These lands also will continue to provide significant revenues to the University of Texas and Texas A&M Systems to help future generations of Texans realize their dreams. So while there is much uncertainty as we say goodbye to 2020, and thankfully, head into 2021, we know there is much opportunity to continue generating unprecedented value from this significant asset.

Mark Houser Chief Executive Officer University Lands

James C. Weaver Chair University Lands Advisory Board Vice Chairman UT System Board of Regents

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CEO & Board Chair Message

which now lie idle...resources of incalculable industrial utility, of wealth and power. Smite the earth, smite the rocks with the rod of knowledge and fountains of unstinted wealth will gush forth.”

Ashbel Smith, M.D. First UT Board of Regents Chairman at the dedication of the University of Texas, 1881

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Fiscal Year 2020 Annual Report

Table of Contents

GOVERNANCE The University of Texas System Board of Regents manages the strategic direction, development activities and stewardship of the Permanent University Fund (PUF) Lands. Separately, the Board for Lease of University Lands, chaired by the Commissioner of the Texas General Land Office, provides statutory oversight and governance for agreements to develop oil and gas located under PUF Lands. The University Lands Advisory Board (ULAB) is charged with providing guidance to the University Lands leadership team to help determine strategy and provide guidance and recommendations to the UT System Board of Regents to ensure responsible stewardship of PUF Lands. The ULAB is made up of industry-savvy members appointed by both the University of Texas and Texas A&M University Systems, as well as a standing position for the Texas Land Commissioner.

UT SYSTEM BOARD OF REGENTS

UT SYSTEM ADMINISTRATION

UNIVERSITY LANDS ADVISORY BOARD 5 UT Representatives 3 Texas A&M Representatives Texas Land Commissioner

BOARD FOR LEASE 2 UT Regents 1 Texas A&M Regent

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Governance

BOARD FOR LEASE OF UNIVERSITY LANDS

George P. Bush Commissioner, Texas General Land Office

Christina Melton Crain Regent, The University of Texas System

Michael A. Hernandez III Regent, Texas A&M University System

Jodie Lee Jiles Regent, The University of Texas System

UNIVERSITY LANDS ADVISORY BOARD

David J. Beck Regent, UT System Partner, Beck Redden, LLP

George P. Bush Commissioner, Texas General Land Office

Thomas L. Carter, Jr. CEO & Chairman, Black Stone Minerals

Mark Albers Retired, Senior Vice President, Exxon Mobil (Departed Aug 2020)

Janeen Judah Independent Director, Patterson-UTI, Crestwood Equity Partners & Aethon (Joined Aug 2020)

Kirk Edwards President & CEO, Latigo Petroleum

Jay C. Graham Regent, TAMU System CEO & Chairman, Spur Energy Partners

Scott C. Kelley Executive Vice Chancellor for Business Affairs, UT System

John L. Zogg, Jr. Managing Director, Crescent Real Estate, LLC.

Jeff Spath Head, TAMU Harold Vance Department of Petroleum Engineering

James C. Weaver, Chair Regent, UT System CEO, McCombs Partners

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Governance

MANAGEMENT

UNIVERSITY LANDS EXECUTIVE LEADERSHIP TEAM

Mark Houser Chief Executive Officer

Brian Owen Senior Vice President, Land

Richard Brantley Senior Vice President, Operations

Maryam Schellstede Vice President, Natural Resource Development

Carrie Clark Executive VP, Chief Administrative Officer & Chief Legal Officer

UNIVERSITY LANDS MANAGEMENT TEAM

Cindy Brooks Director Accounting, Audit & Regulatory

Danielle Jeter Land Manager - Minerals

James Buice Sustainability Manager

Becky Martin Director of IT & Land Services

Sonya Csaszar Managing Counsel

Corey Means Manager - IT Infrastructure & Operations John Tackett Geoscience Manager & Chief Geologist Wil Vark Manager, Bus Solutions & App Development

Jenna Gibbins Senior Reservoir Engineer Amber Jackson Budget & Revenue Manager

Joseph Jarke, Jr. Land Manager-Commercial Surface

Jeff White Manager, Surface Interests

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Management

UNIVERSITY OF TEXAS AT DALLAS SCIENCE BUILDING Funded by the Permanent University Fund Opened in 2020, the UT Dallas Science Building is a 187,237 square foot, multi-story building with classrooms, laboratories, offices and support space for mathematics and physics and the UTeach program. The Science Building supports the students, faculty and staff in the Departments of Physics and Mathematical Sciences as they carry out their learning, teaching, advising, and research activities. The Science Building accommodates growth for 1,750 additional students, 50 tenured and tenure-track faculty members, 20 senior lecturers, and additional research funding of $7,500,000 per year.

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Fiscal Year 2020 Annual Report

MISSION Tomaximize the revenue fromthePermanentUniversityFund (PUF) Landsbyapplying intensivemanagement, accounting, conservation and environmental programs, which improve and sustain the productivity of the PUF Lands, protect the interests of The University of Texas System and promote awareness and sensitivity for the environment.

2020 GOALS

Implement measurable initiatives that increase the next

Improve organizational effectiveness and depth with an emphasis on project management and prioritization.

Grow revenue and continue to formalize UL water business.

10-year pace of oil and gas development.

Continue to prudently lease land for renewables development where it provides the highest and best use.

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