Texas Teachers CIO Jase Auby on oil, energy investing amid rising prices

Texas Teacher Retirement System's Jase Auby, the pension plan's chief investment officer, has made no secret that the nation's fifth-largest pension fund is an eager investor in oil and gas.

That gives him a special point of view given the run-up in energy prices over the past year, and Pensions & Investments asked him to weigh in on what he sees in the private investments portion of the TRS portfolio and what higher oil prices mean for valuations in the sector.

TRS invests heavily in energy, including oil and gas, wind and solar energy companies. The $187.1 billion Austin-based pension fund supports 2 million teachers in Texas, active and retired, or 1 in every 20 Texans.

In the public company universe of energy, Auby makes a few points: "On the public side there was massive consolidation last year, around $200 billion of M&A" activity over the past year or so, as Exxon Mobil bought Pioneer Natural Resources, and Chevron bought Hess.

"That's because the public companies have improved their balance sheets over time, by focusing on cash flow and paying down debt. But that contributed to the overall lack of capital in the space" for energy investing, and "we're continuing to see that lack of capital," Auby said.

For Texas Teachers, that presents opportunities.

The public oil and gas majors "acquired others and entered the next phase, selling off non-core assets. They may have a basin they’re prioritizing like Permian, so they’re selling off (non-core assets), so we’re seeing opportunity by being nimble."

"Public companies don’t want to use use precious internal capital, they’ll bring in private capital to fund new wells. They’re outsourcing to the private side. There's more of that happening now over the past few years because of this renewed focus on managing cash flow and paying down debt. If you’re a big public company in energy and have a huge drilling operation and prices are rising, you don’t have internal capital. You can go get private capital. You’re an outsourced driller."

As oil rises toward $100 a barrel, "the big question for us: As the prices of oil go up, is that going to get capital flowing back into that energy space? We’ll see if that happens or not. We still see this space as being capital constrained. The overall themes are still very much in play; people are exiting the space and not joining in. Pensions and endowments are exiting (oil and gas), and then subsets like us are entering, as well as family offices. They’re less attuned to the pressures on energy and looking for high returns."

Geopolitics

Auby is watching geopolitics, amid headlines this past week that Iran is planning an imminent attack on Israel, which could widen the war in the Middle East.

"We’re watching that, but recall the attacks on the Saudis several years ago that did not ultimately have an impact" on prices in energy markets. "I do wonder if impacts will be muted in the Middle East. That tends to be the pattern on geopolitical events. There’s an overreaction at first, but reverts back," he said.

Geopolitics also doesn't affect TRS' private investments in oil and gas. "Nearly all our private investing is in the U.S.," he said.