The investment history of the PUF originated in 1923 with the discovery of oil and gas from the legendary Santa Rita No. 1 well. In 1926, the Texas Supreme Court ruled that the proceeds from the sale of mineral production from PUF Lands should be invested as endowment corpus. These proceeds provided the foundation for the PUF Investments to grow to $8.1 billion over the ensuing 81 years, as depicted in Figure A.
Since 1923, a cumulative $6,719.8 million, or approximately 60.7% of cumulative investment return generated on PUF Investments, has been distributed to the AUF in support of the UT System and TAMU System. Over this same time period, the mineral income contributed $3,728.0 million to the PUF investment portfolio.
In more recent times, the PUF has continued to grow as depicted in Figure B.
The PUF's net assets have grown from $7,465.6 million to $8,087.9 million, an increase of 8.3% after distributions over the past five years. Fiscal year 2004 resulted in the second consecutive year of strong investment returns, more than offsetting the less favorable investment markets in 2001 and 2002.
In addition to strong investment returns during fiscal 2004, the PUF also benefited from the second consecutive year of substantial increases in PUF Lands mineral contributions. Mineral contributions provide a significant and valuable inflow of dollars, continuing to provide the funds to invest and build a stronger investment portfolio.
The 43.7% increase in mineral income contributed to the PUF in year 2004 versus the prior fiscal year was due to several factors, including $40.4 million of bonuses paid on the sales of oil and gas leases. A major deep gas development primarily in Loving County resulted in the highest bonus received since the boom years of the 1980's. As a comparison, $2.0 million was received as bonus income in fiscal year 2003.
Royalties on the production of crude oil also contributed to the increase in mineral income over last year, amounting to 40.3% of the total mineral contributions for 2004, and increasing by 2.3% over 2003. Commodity oil prices continued their upward spiral in 2004, with average oil prices realized on royalty oil production increasing by 11.48% to $32.96/bbl. Although production for the year decreased by 8.5%, this was offset by the average increase in oil prices amounting to $3.39 per barrel. Royalties on the production of gas accounted for another 30% of PUF Lands mineral income. Commodity gas prices continued their upward spiral in fiscal year 2004 as well, as average gas prices realized on royalty gas production increased by 10.7% to $4.23/mcf. Gas royalties increased by 9.7%, a result of the increase in wellhead gas prices, slightly offset as net production decreased by 1.6%.
Looking ahead for 2005, we expect mineral income to continue its growing contribution to the PUF. Platts, a leading oil and gas price tracking service, predicts natural gas prices to average $6.25/mcf in 2005 and forecast $40/bbl for West Texas Intermediate Oil. In addition, PUF Land's management believes that the dip in production levels in 2004 will be restored to or near previous levels.
Even with the extremely valuable PUF Lands and the continual inflow of mineral contributions, $1.2 billion credited over the past 14 years alone, preservation of PUF endowment purchasing power is still critically dependent on investment returns,
as evidenced by examining the components of growth in the value of PUF Investments since 1976, depicted in Figure C.
It is The University of Texas Investment Management Company's (UTIMCO) responsibility to invest the PUF Land contributions and preserve the PUF's purchasing power. The results are further addressed in the Investment Return and Market Commentary section of this report.