LETTER TO STOCKHOLDERS
We submit herewith the financial statements of the Corporation for the nine months ended September 30, 2003. In addition, there is a schedule of investments, along with other financial information.
Net assets of the Corporation at September 30, 2003 were $22.26 per share on 21,286,667 shares outstanding, compared with $20.98 per share at December 31, 2002 on 21,510,067 shares outstanding. On March 1, 2003, a distribution of $0.13 per share was paid, consisting of $0.09 from 2002 long-term capital gain, $0.03 from 2002 investment income and $0.01 from 2003 investment income, all taxable in 2003. 2003 investment income dividends of $0.13 per share were paid on June 1, 2003 and September 1, 2003.
Net investment income for the nine months ended September 30, 2003 amounted to $6,629,020, compared with $7,261,163 for the same period in 2002. These earnings are equal to $0.31 and $0.34 per share on the average number of shares outstanding during each period.
Net capital gain realized on investments for the nine months ended September 30, 2003 amounted to $12,429,429, the equivalent of $0.58 per share.
Current and potential shareholders can find information about the Corporation, including the daily net asset value (NAV) per share, the market price, and the discount/premium to the NAV, at its site on the Internet. The address for the website is www.peteres.com. Also available at the website are a brief history of the Corporation, historical financial information, and more general industry material. Further information regarding shareholder services is located on page 12 of this report.
On November 1, 2003, the Corporation is changing its transfer agent to American Stock Transfer & Trust Company. Additional information about this change is contained in the Investor Express newsletter included with the mailing of this report.
The Corporation is an internally-managed equity fund emphasizing petroleum and other natural resource investments. The investment policy of the Corporation is based on the primary objectives of preservation of capital, the attainment of reasonable income from investments, and an opportunity for capital appreciation.
By order of the Board of Directors,
Douglas G. Ober,
Chairman, President and
Chief Executive Officer
October 17, 2003
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2003
(unaudited)
| Assets |
||||||
| Investments* at value: |
||||||
| Common stocks and convertible securities |
||||||
| (cost $268,324,849) |
$ | 403,492,671 | ||||
| Short-term investments (cost $69,401,806) |
69,401,806 | |||||
| Securities lending collateral (cost $26,995,340) |
26,995,340 | $ | 499,889,817 | |||
| Cash |
332,467 | |||||
| Receivables: |
||||||
| Investment securities sold |
721,020 | |||||
| Dividends and interest |
552,279 | |||||
| Prepaid expenses and other assets |
1,256,857 | |||||
| Total Assets |
502,752,440 | |||||
| Liabilities |
||||||
| Investment securities purchased |
566,765 | |||||
| Open written option contracts at value (proceeds $172,541) |
238,250 | |||||
| Obligations to return securities lending collateral |
26,995,340 | |||||
| Accrued expenses |
1,029,896 | |||||
| Total Liabilities |
28,830,251 | |||||
| Net Assets |
$ | 473,922,189 | ||||
| Net Assets |
||||||
| Common Stock at par value $1.00 per share, authorized 50,000,000 shares; issued and outstanding 21,286,667 shares |
$ | 21,286,667 | ||||
| Additional capital surplus |
303,480,460 | |||||
| Undistributed net investment income |
1,698,519 | |||||
| Undistributed net realized gain on investments |
12,354,430 | |||||
| Unrealized appreciation on investments |
135,102,113 | |||||
| Net Assets Applicable to Common Stock |
$ | 473,922,189 | ||||
| Net Asset Value Per Share of Common Stock |
$22.26 | |||||
* See Schedule of Investments on pages 8 and 9.
The accompanying notes are an integral part of the financial statements.
2
STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2003
(unaudited)
| Investment Income |
|||
| Income: |
|||
| Dividends |
$ | 8,347,853 | |
| Interest and other income |
665,822 | ||
| Total income |
9,013,675 | ||
| Expenses: |
|||
| Investment research |
976,451 | ||
| Administration and operations |
612,459 | ||
| Directors’ fees |
153,500 | ||
| Reports and stockholder communications |
195,462 | ||
| Transfer agent, registrar and custodian expenses |
127,364 | ||
| Auditing and accounting services |
54,418 | ||
| Legal services |
25,757 | ||
| Occupancy and other office expenses |
119,326 | ||
| Travel, telephone and postage |
41,530 | ||
| Other |
78,388 | ||
| Total expenses |
2,384,655 | ||
| Net Investment Income |
6,629,020 | ||
| Realized Gain and Change in Unrealized Appreciation on Investments |
|||
| Net realized gain on security transactions |
12,429,429 | ||
| Change in unrealized appreciation on investments |
16,321,506 | ||
| Net Gain on Investments |
28,750,935 | ||
| Change in Net Assets Resulting from Operations |
$ | 35,379,955 | |
The accompanying notes are an integral part of the financial statements.
3
STATEMENTS OF CHANGES IN NET ASSETS
| Nine Months Ended September 30, 2003 |
Year Ended December 31, 2002 |
|||||||
| (unaudited) | ||||||||
| From Operations: |
||||||||
| Net investment income |
$ | 6,629,020 | $ | 8,983,077 | ||||
| Net realized gain on investments |
12,429,429 | 14,332,921 | ||||||
| Change in unrealized appreciation on investments |
16,321,506 | (82,017,470 | ) | |||||
| Change in net assets resulting from operations |
35,379,955 | (58,701,472 | ) | |||||
| Dividends to Stockholders from: | ||||||||
| Net investment income |
(6,405,392 | ) | (9,069,217 | ) | ||||
| Net realized gain from investment transactions |
(1,934,492 | ) | (14,302,830 | ) | ||||
| Decrease in net assets from distributions |
(8,339,884 | ) | (23,372,047 | ) | ||||
| From Capital Share Transactions: |
||||||||
| Value of shares issued in payment of distributions |
— | 9,954,365 | ||||||
| Cost of shares purchased (Note 4) |
(4,393,345 | ) | (3,097,181 | ) | ||||
| Change in net assets from capital share transactions |
(4,393,345 | ) | 6,857,184 | |||||
| Total Change in Net Assets |
22,646,726 | (75,216,335 | ) | |||||
| Net Assets: |
||||||||
| Beginning of period |
451,275,463 | 526,491,798 | ||||||
| End of period (including undistributed net investment |
$ | 473,922,189 | $ | 451,275,463 | ||||
The accompanying notes are an integral part of the financial statements.
4
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Petroleum & Resources Corporation (the Corporation) is registered under the Investment Company Act of 1940 as a non-diversified investment company. The Corporation’s investment objectives as well as the nature and risk of its investment transactions are set forth in the Corporation’s registration statement.
Security Valuation—Investments in securities traded on national security exchanges are valued at the last reported sale price on the day of valuation. Over-the-counter and listed securities for which a sale price is not available are valued at the last quoted bid price. Short-term investments (excluding purchased options) are valued at amortized cost. Purchased and written options are valued at the last quoted asked price.
Security Transactions and Investment Income—Investment transactions are accounted for on the trade date. Gain or loss on sales of securities and options is determined on the basis of identified cost. Dividend income and distributions to shareholders are recognized on the ex-dividend date, and interest income is recognized on the accrual basis.
2. FEDERAL INCOME TAXES
The Corporation’s policy is to distribute all of its taxable income to its shareholders in compliance with the requirements of the Internal Revenue Code applicable to regulated investment companies. Therefore, no federal income tax provision is required. For federal income tax purposes, the identified cost of securities, including options, at September 30, 2003 was $364,930,422, and net unrealized appreciation aggregated $135,131,936, of which the related gross unrealized appreciation and depreciation were $162,764,124 and $27,632,188, respectively.
Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Accordingly, annual reclassifications are made within the Corporation’s capital accounts to reflect income and gains available for distribution under income tax regulations.
3. INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than options and short-term investments, during the nine months ended September 30, 2003 were $23,608,437 and $49,129,651, respectively. Options may be written (sold) or purchased by the Corporation. The Corporation, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. The risk associated with purchasing an option is limited to the premium originally paid. A schedule of outstanding option contracts as of September 30, 2003 can be found on page 10.
Transactions in written covered call and collateralized put options during the nine months ended September 30, 2003 were as follows:
| Covered Calls |
Collateralized Puts |
|||||||||||||
| Contracts |
Premiums |
Contracts |
Premiums |
|||||||||||
| Options outstanding, December 31, 2002 |
625 | $ | 58,228 | 300 | $ | 32,392 | ||||||||
| Options written |
1,850 | $ | 228,614 | 2,100 | 269,688 | |||||||||
| Options terminated in closing purchase transactions |
— | — | (100 | ) | (10,143 | ) | ||||||||
| Options expired |
(1,535 | ) | (177,753 | ) | (1,366 | ) | (186,853 | ) | ||||||
| Options exercised |
(165 | ) | (19,345 | ) | (184 | ) | (22,287 | ) | ||||||
| Options outstanding, September 30, 2003 |
775 | $ | 89,744 | 750 | $ | 82,797 | ||||||||
All investment decisions are made by a committee, and no one person is primarily responsible for making recommendations to that committee.
4. CAPITAL STOCK
The Corporation has 5,000,000 authorized and unissued preferred shares without par value.
On December 27, 2002, the Corporation issued 521,854 shares of its Common Stock at a price of $19.075 per share (the average market price on December 9, 2002) to stockholders of record on November 25, 2002 who elected to take stock in payment of the distribution from 2002 capital gain and investment income.
The Corporation may purchase shares of its Common Stock from time to time at such prices and amounts as the Board of Directors may deem advisable.
Transactions in Common Stock for 2003 and 2002 were as follows:
| Shares |
Amount |
|||||||||||||
| Nine months ended September 30, 2003 |
Year ended December 31, 2002 |
Nine months ended September 30, 2003 |
Year ended December 31, 2002 |
|||||||||||
| Shares issued in payment of dividends |
— | 521,854 | $ — | $ | 9,954,365 | |||||||||
| Shares purchased |
(223,400 | ) | (159,350 | ) | (4,393,345 | ) | (3,097,181 | ) | ||||||
| Net change |
(223,400 | ) | 362,504 | $ | (4,393,345 | ) | $ | 6,857,184 | ||||||
5
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The cost of the 238,300 shares of Common Stock held by the Corporation at September 30, 2003 and of the 14,900 shares of Common Stock held at December 31, 2002 amounted to $4,678,562 and $285,217 on each respective date.
The Corporation has an employee incentive stock option and stock appreciation rights plan which provides for the issuance of options and stock appreciation rights for the purchase of up to 895,522 shares of the Corporation’s Common Stock at 100% of the fair market value at date of grant. Options are exercisable beginning not less than one year after the date of grant and extend and vest over ten years from the date of grant. Stock appreciation rights are exercisable beginning not less than two years after the date of grant and extend over the period during which the option is exercisable. The stock appreciation rights allow the holders to surrender their rights to exercise their options and receive cash or shares in an amount equal to the difference between the option price and the fair market value of the Common Stock at the date of surrender.
Under the plan, the exercise price of the options and related stock appreciation rights is reduced by the per share amount of capital gain paid by the Corporation during subsequent years. At the beginning of 2003, there were 152,012 options outstanding at a weighted average exercise price of $18.07 per share. During the nine months ended September 30, 2003, the Corporation granted options including stock appreciation rights for 21,258 shares of Common Stock with an exercise price of $19.29. During the nine months ended September 30, 2003, stock appreciation rights relating to 17,880 stock option shares were exercised at a weighted average market price of $20.24 per share and the stock options relating to these rights with a weighted average exercise price of $10.21 per share were cancelled. Stock options and stock appreciation rights relating to 25,943 shares, with a weighted average exercise price of $19.46, were cancelled. At September 30, 2003, there were outstanding exercisable options to purchase 38,866 common shares at $9.03-$25.25 per share (weighted average price of $18.77) and unexercisable options to purchase 90,581 common shares at $11.64-$25.25 per share (weighted average price of $19.03). The weighted average remaining contractual life of outstanding exercisable and unexercisable options was 5.42 years and 6.43 years, respectively. The total compensation expense for stock options and stock appreciation rights recognized for the nine months ended September 30, 2003 was $135,924. At September 30, 2003, there were 279,614 shares available for future option grants.
5. RETIREMENT PLANS
The Corporation provides retirement benefits for its employees under a non-contributory qualified defined benefit pension plan. The benefits are based on years of service and compensation during the last five years of employment. The Corporation’s current funding policy is to contribute annually to the plan only those amounts that can be deducted for federal income tax purposes. As of September 30, 2003, the plan assets, consisting primarily of investments in individual stocks, bonds and mutual funds were $3,093,115. In determining the actuarial present value of the projected benefit obligation, the interest rate used for the weighted average discount rate was 6.75%, the expected rate of annual salary increases was 7.0%, and the long-term expected rate of return on plan assets was 8.0%. The projected benefit obligation as of September 30, 2003 was $3,707,291. Prepaid pension cost included in other assets at September 30, 2003 was $834,964.
In addition, the Corporation has a nonqualified benefit plan which provides employees with defined retirement benefits to supplement the qualified plan. The Corporation does not provide postretirement medical benefits.
6. EXPENSES
The cumulative amount of accrued expenses at September 30, 2003 for employees and former employees of the Corporation was $954,438. Aggregate remuneration paid or accrued during the nine months ended September 30, 2003 to key employees and directors amounted to $803,185.
7. PORTFOLIO SECURITIES LOANED
The Corporation makes loans of securities to brokers, secured by cash deposits, U.S. Government securities, or bank letters of credit. The Corporation accounts for securities lending transactions as secured financing and receives compensation in the form of fees or retains a portion of interest on the investment of any cash received as collateral. The Corporation also continues to receive interest or dividends on the securities loaned. The loans are secured at all times by collateral of at least 102% of the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of securities loaned that may occur during the term of the loan will be for the account of the Corporation. At September 30, 2003, the Corporation had securities on loan of $26,149,715 and held collateral of $26,995,340, consisting of repurchase agreements.
6
FINANCIAL HIGHLIGHTS
| Nine Months Ended |
||||||||||||||
| (unaudited) | ||||||||||||||
| Sept. 30, 2003 |
Sept. 30, 2002 |
Year Ended December 31 | ||||||||||||
| 2002 |
2001 |
2000 |
1999 |
1998 | ||||||||||
| Per Share Operating Performance* |
||||||||||||||
| Net asset value, beginning of period |
$20.98 | $24.90 | $24.90 | $32.69 | $26.32 | $22.87 | $27.64 | |||||||
| Net investment income |
0.31 | 0.34 | 0.42 | 0.49 | 0.37 | 0.48 | 0.55 | |||||||
| Net realized gains and change in unrealized appreciation |
1.34 | (4.30) | (3.20) | (6.81) | 7.67 | 4.67 | (3.73) | |||||||
| Total from investment operations |
1.65 | (3.96) | (2.78) | (6.32) | 8.04 | 5.15 | (3.18) | |||||||
| Less distributions |
||||||||||||||
| Dividends from net investment income |
(0.30) | (0.30) | (0.43) | (0.43) | (0.39) | (0.48) | (0.52) | |||||||
| Distributions from net realized gains |
(0.09) | (0.09) | (0.68) | (1.07) | (1.35) | (1.07) | (1.01) | |||||||
| Total distributions |
(0.39) | (0.39) | (1.11) | (1.50) | (1.74) | (1.55) | (1.53) | |||||||
| Capital share repurchases |
0.02 | — | 0.01 | 0.06 | 0.28 | 0.01 | — | |||||||
| Reinvestment of distributions |
— | — | (0.04) | (0.03) | (0.21) | (0.16) | (0.06) | |||||||
| Total capital share transactions |
0.02 | — | (0.03) | 0.03 | 0.07 | (0.15) | (0.06) | |||||||
| Net asset value, end of period |
$22.26 | $20.55 | $20.98 | $24.90 | $32.69 | $26.32 | $22.87 | |||||||
| Per share market price, end of period |
$21.30 | $19.05 | $19.18 | $23.46 | $27.31 | $21.50 | $20.42 | |||||||
| Total Investment Return |
||||||||||||||
| Based on market price |
13.2% | (17.4)% | (13.7)% | (8.7)% | 36.1% | 13.3% | (10.0)% | |||||||
| Based on net asset value |
8.1% | (16.1)% | (11.1)% | (19.0)% | 33.1% | 23.8% | (11.1)% | |||||||
| Ratios/Supplemental Data |
||||||||||||||
| Net assets, end of period (in 000’s) |
$473,922 | $433,143 | $451,275 | $526,492 | $688,173 | $565,075 | $474,821 | |||||||
| Ratio of expenses to average net assets |
0.69%† |
0.43%† | 0.49% | 0.35% | 0.59% | 0.43% | 0.31% | |||||||
| Ratio of net investment income to |
1.93%† |
1.91%† | 1.84% | 1.67% | 1.24% | 1.86% | 2.13% | |||||||
| Portfolio turnover |
7.84%† |
9.26%† | 9.69% | 6.74% | 7.68% | 11.89% | 12.70% | |||||||
| Number of shares outstanding at |
21,287 | 21,075 | 21,510 | 21,148 | 21,054 | 21,471 | 20,762 | |||||||
*Prior years have been adjusted to reflect the 3-for-2 stock split effected in October 2000. Certain prior year amounts have been reclassified to conform to current year presentation.
†Ratios presented on an annualized basis.
7
SCHEDULE OF INVESTMENTS
September 30, 2003
(unaudited)
| Shares |
Value (A) | ||||
| Stocks And Convertible Securities — 85.1% |
|||||
| Energy — 73.4% |
|||||
| Internationals — 26.1% |
|||||
| BP plc ADR (B) |
500,000 | $ | 21,050,000 | ||
| ChevronTexaco Corp. |
300,000 | 21,435,000 | |||
| Exxon Mobil Corp. |
1,050,000 | 38,430,000 | |||
| Royal Dutch Petroleum Co. |
600,000 | 26,520,000 | |||
| “Shell” Transport and Trading Co., plc ADR |
150,000 | 5,664,000 | |||
| Total S.A. ADR (B) |
140,000 | 10,612,000 | |||
| 123,711,000 | |||||
| Domestics — 7.4% |
|||||
| Amerada Hess Corp. |
50,000 | 2,505,000 | |||
| ConocoPhillips |
200,000 | 10,950,000 | |||
| Kerr McGee Corp. |
177,153 | 7,908,110 | |||
| Murphy Oil Corp. |
87,500 | 5,140,625 | |||
| Unocal Capital Trust $3.125 Conv. Pfd. |
72,540 | 3,708,608 | |||
| Unocal Corp. |
150,000 | 4,728,000 | |||
| 34,940,343 | |||||
| Producers — 11.4% |
|||||
| Apache Corp. |
120,000 | 8,320,800 | |||
| Burlington Resources Inc. |
133,400 | 6,429,880 | |||
| Devon Energy Corp. |
198,720 | 9,576,317 | |||
| EOG Resources, Inc. |
200,000 | 8,348,000 | |||
| Noble Energy, Inc. (B) |
125,000 | 4,787,500 | |||
| Occidental Petroleum Corp. |
200,000 | 7,046,000 | |||
| Pioneer Natural Resources Co. (C) |
231,000 | 5,881,260 | |||
| Stone Energy Corp. (C) |
104,300 | 3,679,703 | |||
| 54,069,460 | |||||
| Distributors — 16.9% |
|||||
| AGL Resources Inc. |
160,000 | 4,507,200 | |||
| Atmos Energy Corp. (B) |
40,000 | 957,600 | |||
| Duke Energy Corp. 8.25% Conv. Pfd. due 2004 (B) |
160,000 | 2,089,600 | |||
| Duke Energy Corp. |
115,000 | 2,048,150 | |||
| El Paso Corp. |
210,000 | 1,533,000 | |||
| Energen Corp. |
200,000 | 7,236,000 | |||
| Equitable Resources Inc. |
250,000 | 10,275,000 | |||
| Keyspan Corp. |
220,000 | 7,717,600 | |||
| Kinder Morgan, Inc. |
150,000 | 8,101,500 | |||
| Shares |
Value (A) | ||||
| MDU Resources Group, Inc. |
200,000 | $ | 6,756,000 | ||
| National Fuel Gas Co. |
200,000 | 4,570,000 | |||
| New Jersey Resources Corp. |
277,500 | 10,001,100 | |||
| Questar Corp. |
255,000 | 7,856,550 | |||
| TECO Energy, Inc. (B) |
200,000 | 2,764,000 | |||
| Williams Companies, Inc. 9.0% |
120,000 | 1,597,200 | |||
| Williams Companies, Inc. (B) |
200,000 | 1,884,000 | |||
| 79,894,500 | |||||
| Services — 11.6% |
|||||
| Baker Hughes, Inc. |
130,000 | 3,846,700 | |||
| BJ Services Co. (C) |
380,000 | 12,984,600 | |||
| GlobalSantaFe Corp. |
200,000 | 4,790,000 | |||
| Grant Prideco Inc. (C) |
308,000 | 3,138,520 | |||
| Nabors Industries Ltd. (C) |
125,000 | 4,657,500 | |||
| Noble Corp. (C) |
135,000 | 4,588,650 | |||
| Schlumberger Ltd. |
280,000 | 13,552,000 | |||
| Weatherford International, |
205,000 | 7,744,900 | |||
| 55,302,870 | |||||
| Basic Industries — 11.7% |
|||||
| Basic Materials & Other — 8.5% |
|||||
| Albemarle Corp. |
200,000 | 5,490,000 | |||
| Arch Coal Inc. |
250,000 | 5,552,500 | |||
| General Electric Co. |
329,800 | 9,831,338 | |||
| Ingersoll-Rand Co. Ltd. |
100,000 | 5,344,000 | |||
| Philadelphia Suburban Corp. |
305,000 | 7,344,400 | |||
| Rohm & Haas Co. |
200,000 | 6,690,000 | |||
| 40,252,238 | |||||
| Paper and Forest Products — 3.2% |
|||||
| Boise Cascade Corp. 7.5% ACES due 2004 |
51,000 | 2,308,260 | |||
| Boise Cascade Corp. |
205,000 | 5,658,000 | |||
| MeadWestvaco Corp. |
60,000 | 1,530,000 | |||
| Temple-Inland Inc. |
120,000 | 5,826,000 | |||
| 15,322,260 | |||||
| Total Stocks And Convertible Securities |
|||||
| (Cost $268,324,849) (D) |
403,492,671 | ||||
8
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 2003
(unaudited)
| Prin. Amt. |
Value (A) | |||||
| Short-Term Investments — 14.7% |
||||||
| U.S. Government Obligations — 1.5% |
||||||
| U.S. Treasury Bills, |
$ | 7,000,000 | $ | 6,991,250 | ||
| Certificates of Deposit — 2.1% |
||||||
| Mercantile-Safe Deposit & |
10,000,000 | 10,000,000 | ||||
| Commercial Paper — 11.1% |
||||||
| American General Finance Corp., |
4,585,000 | 4,583,872 | ||||
| Cargill, Inc., |
4,635,000 | 4,631,765 | ||||
| Caterpillar Financial Services Corp., 1.00-1.01%, |
5,000,000 | 4,998,141 | ||||
| ChevronTexaco Funding Corp., 1.00%, due 10/28/03 |
2,500,000 | 2,498,125 | ||||
| Chevron UK, |
2,500,000 | 2,499,422 | ||||
| GMAC MINT, |
5,000,000 | 4,996,610 | ||||
| General Electric Capital Corp., |
4,835,000 | 4,832,716 | ||||
| Gillette Co., |
5,000,000 | 4,996,053 | ||||
| Prin. Amt. |
Value (A) |
||||||
| Nestle Capital Corp., |
$ | 3,775,000 | $ | 3,768,155 | |||
| Pfizer Inc., |
2,350,000 | 2,348,694 | |||||
| Schering-Plough Corp., |
2,960,000 | 2,959,230 | |||||
| Toyota Motor Credit Corp., 1.01%, due 10/16/03 |
5,000,000 | 4,997,896 | |||||
| Verizon Network Funding Inc., 1.03%, due 10/2/03 |
4,300,000 | 4,299,877 | |||||
| 52,410,556 | |||||||
| Total Short-Term Investments |
|||||||
| (Cost $69,401,806) |
69,401,806 | ||||||
| Investments of Proceeds from Security Lending — 5.7% | |||||||
| Deutsche Bank Securities Inc., repurchase agreement, |
24,995,212 | ||||||
| JP Morgan Securities, |
2,000,128 | ||||||
| Total Investments of Proceeds from Security Lending |
26,995,340 | ||||||
| Total Investments — 105.5% |
|||||||
| (Cost $364,721,995) |
499,889,817 | ||||||
| Cash, receivables and other assets, less liabilities — (5.5)% |
(25,967,628 | ) | |||||
| Net Assets — 100.0% |
$ | 473,922,189 | |||||
Notes:
| (A) | See note 1 to financial statements. Securities are listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ. |
| (B) | Some or all of these securities are on loan. See note 7 to financial statements. |
| (C) | Presently non-dividend paying. |
| (D) | The aggregate market value of stocks held in escrow at September 30, 2003 covering open call option contracts written was $4,656,575. In addition, the aggregate market value of securities segregated by the custodian required to collateralize open put option contracts written was $3,137,500. |
9
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
September 30, 2003
(unaudited)
| Contracts (100 shares each) |
Security |
Strike Price |
Contract Expiration Date |
Appreciation/ (Depreciation) |
|||||||||
| COVERED CALLS | |||||||||||||
| 150 |
Amerada Hess Corp. | $ 55 | Nov | 03 | $ | 9,424 | |||||||
| 100 |
Apache Corp. | 70 | Oct | 03 | (1,401 | ) | |||||||
| 100 |
Apache Corp. | 75 | Jan | 04 | (2,801 | ) | |||||||
| 100 |
ChevronTexaco Corp. | 75 | Dec | 03 | 50 | ||||||||
| 100 |
Devon Energy Corp. | 55 | Oct | 03 | 19,999 | ||||||||
| 125 |
Murphy Oil Corp. | 50 | Oct | 03 | (100,626 | ) | |||||||
| 100 |
Murphy Oil Corp. | 55 | Oct | 03 | (35,400 | ) | |||||||
| 775 |
(110,755 | ) | |||||||||||
| COLLATERALIZED PUTS | |||||||||||||
| 50 |
Albemarle Corp. | 22.50 | Dec | 03 | 3,550 | ||||||||
| 200 |
Burlington Resources Inc. | 45 | Nov | 03 | 8,249 | ||||||||
| 200 |
Burlington Resources Inc. | 40 | Feb | 04 | 7,999 | ||||||||
| 150 |
ConocoPhillips | 45 | Nov | 03 | 15,149 | ||||||||
| 50 |
ConocoPhillips | 50 | Nov | 03 | 3,500 | ||||||||
| 100 |
Schlumberger Ltd. | 40 | Nov | 03 | 6,599 | ||||||||
| 750 |
45,046 | ||||||||||||
| $ | (65,709 | ) | |||||||||||
CHANGES IN PORTFOLIO SECURITIES
During the Three Months Ended September 30, 2003
(unaudited)
| Shares | ||||||
| Additions |
Reductions |
Held September 30, 2003 | ||||
| AGL Resources Inc. |
160,000 | 160,000 | ||||
| Burlington Resources Inc. |
133,400 | 133,400 | ||||
| Occidental Petroleum Corp. |
25,000 | 200,000 | ||||
| Schlumberger Ltd. |
55,000 | 280,000 | ||||
| Anadarko Petroleum Corp. |
55,000 | — | ||||
| Apache Corp. |
27,000 | 120,000 | ||||
| Atmos Energy Corp. |
99,500 | 40,000 | ||||
| Core Laboratories N.V. |
75,000 | — | ||||
| Energen Corp. |
50,000 | 200,000 | ||||
| Equitable Resources Inc. |
50,000 | 250,000 | ||||
| General Electric Co. |
20,200 | 329,800 | ||||
| Kinder Morgan, Inc. |
12,500 | 150,000 | ||||
| Murphy Oil Corp. |
52,500 | 87,500 | ||||
| Northwestern Corp. |
16,500 | — | ||||
| Pioneer Natural Resources Co. |
4,000 | 231,000 | ||||
| Questar Corp. |
13,000 | 255,000 | ||||
| Royal Dutch Petroleum Co. |
60,000 | 600,000 | ||||
| Transocean Inc. |
110,000 | — | ||||
10
HISTORICAL FINANCIAL STATISTICS
| December 31 |
Value of Net Assets |
Shares Outstanding* |
Net Asset Value per Share* |
Dividends Net Investment |
Distributions Net Realized | |||||||||
| 1993 |
$ | 355,836,592 | 18,010,007 | $ | 19.76 | $ | .55 | $ | .87 | |||||
| 1994 |
332,279,398 | 18,570,450 | 17.89 | .61 | .79 | |||||||||
| 1995 |
401,404,971 | 19,109,075 | 21.01 | .58 | .81 | |||||||||
| 1996 |
484,588,990 | 19,598,729 | 24.73 | .55 | .88 | |||||||||
| 1997 |
556,452,549 | 20,134,181 | 27.64 | .51 | 1.04 | |||||||||
| 1998 |
474,821,118 | 20,762,063 | 22.87 | .52 | 1.01 | |||||||||
| 1999 |
565,075,001 | 21,471,270 | 26.32 | .48 | 1.07 | |||||||||
| 2000 |
688,172,867 | 21,053,644 | 32.69 | .39 | 1.35 | |||||||||
| 2001 |
526,491,798 | 21,147,563 | 24.90 | .43 | 1.07 | |||||||||
| 2002 |
451,275,463 | 21,510,067 | 20.98 | .43 | .68 | |||||||||
| September 30, 2003 (unaudited) |
473,922,189 | 21,286,667 | 22.26 | .30 | .09 | |||||||||
| * | Prior years have been adjusted to reflect the 3-for-2 stock split effected in October 2000. |
Common Stock
Listed on the New York Stock Exchange
and the Pacific Exchange
Petroleum & Resources Corporation
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(410) 752-5900 or (800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
Counsel: Chadbourne & Parke L.L.P.
Independent Auditors: PricewaterhouseCoopers LLP
Transfer Agent, Registrar & Custodian of Securities: The Bank of New York
This report, including the financial statements herein, is transmitted to the stockholders of Petroleum & Resources Corporation for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Corporation or of any securities mentioned in this report. The rates of return will vary and the market value of an investment will fluctuate. Shares, if sold, may be worth more or less than their original cost. Past performance is not indicative of future investment results.
11
SHAREHOLDER INFORMATION AND SERVICES
DIVIDEND PAYMENT SCHEDULE
The Corporation presently pays dividends four times a year, as follows: (a) three interim distributions on or about March 1, June 1, and September 1 and (b) a “year-end” distribution, payable in late December, consisting of the estimated balance of the net investment income for the year and the net realized capital gain earned through October 31. Stockholders may elect to receive the year-end distribution in stock or cash. In connection with this distribution, all stockholders of record are sent a dividend announcement notice and an election card in mid-November.
Stockholders holding shares in “street” or brokerage accounts may make their elections by notifying their brokerage house representative.
BuyDIRECTSM*
BuyDIRECT is a direct purchase and sale plan, as well as a dividend reinvestment plan, sponsored and administered by our transfer agent, The Bank of New York. The Plan provides registered stockholders and interested first time investors an affordable alternative for buying, selling, and reinvesting in Petroleum & Resources shares.
The costs to participants in administrative service fees and brokerage commissions for each type of transaction are listed below.
| Initial Enrollment |
$ | 7.50 |
A one-time fee for new accounts who are not currently registered holders.
| Optional Cash Investments | ||
| Service Fee |
$2.50 per investment | |
| Brokerage Commission |
$0.05 per share | |
| Reinvestment of Dividends** | ||
| Service Fee |
10% of amount invested | |
| (maximum of $2.50 per investment) | ||
| Brokerage Commission |
$0.05 per share | |
| Sale of Shares | ||
| Service Fee |
$10.00 | |
| Brokerage Commission |
$0.05 per share | |
| Deposit of Certificates for safekeeping | Included | |
| Book to Book Transfers | Included | |
To transfer shares to another participant or to a new participant
Fees are subject to change at any time.
Minimum and Maximum Cash Investments
| Initial minimum investment (non-holders) |
$500.00 | ||
| Minimum optional investment (existing holders) |
$50.00 | ||
| Electronic Funds Transfer (monthly minimum) |
$50.00 | ||
| Maximum per transaction |
$ | 25,000.00 | |
| Maximum per year |
NONE |
A brochure which further details the benefits and features of BuyDIRECT as well as an enrollment form may be obtained by contacting The Bank of New York.
For Non-Registered Shareholders
For shareholders whose stock is held by a broker in “street” name, The Bank of New York’s Automatic Dividend Reinvestment Plan remains available through many registered investment security dealers. If your shares are currently held in a “street” name or brokerage account, please contact your broker for details about how you can participate in the Plan or contact The Bank of New York about the BuyDIRECT Plan.
On November 1, 2003, the Corporation is changing its transfer agent to American Stock Transfer & Trust Company. A description of the new services available through American Stock Transfer & Trust Company will be provided to shareholders after the transition is completed.
The Corporation
Petroleum & Resources Corporation
Lawrence L. Hooper, Jr.
Vice President, Secretary and General Counsel
Seven St. Paul Street, Suite 1140
Baltimore, MD 21202
(800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
The Transfer Agent
The Bank of New York
Address Shareholder Inquiries to:
Shareholder Relations Department
P.O. Box 11258 Church Street Station
New York, NY 10286
(866) 723-8330
Website: www.stockbny.com
E-mail: Shareowners@bankofny.com
Send Certificates for Transfer
and Address Changes to:
Receive and Deliver Department
P.O. Box 11002 Church Street Station
New York, NY 10286
*BuyDIRECT is a service mark of The Bank of New York.
**The year-end dividend and capital gain distribution may be made in newly issued shares of common stock. There would be no fees or commissions in connection with this dividend and capital gain distribution when made in newly issued shares.
12
PETROLEUM & RESOURCES CORPORATION
Board of Directors
| Enrique R. Arzac 2,4 |
Douglas G. Ober 1 | |
| Daniel E. Emerson 1,3 |
Landon Peters 2,3 | |
| Edward J. Kelly, III 1,4 |
John J. Roberts 1,2 | |
| Thomas H. Lenagh 1,4 |
Susan C. Schwab 1,3 | |
| W.D. MacCallan 3,4 |
Robert J.M. Wilson 1,3 | |
| W. Perry Neff 2,4 |
| 1. | Member of Executive Committee |
| 2. | Member of Audit Committee |
| 3. | Member of Compensation Committee |
| 4. | Member of Retirement Benefits Committee |
Officers
| Douglas G. Ober |
Chairman, President and Chief Executive Officer | |
| Joseph M. Truta |
Executive Vice President | |
| Nancy J.F. Prue |
Vice President—Research | |
| Lawrence L. Hooper, Jr. |
Vice President, Secretary and General Counsel | |
| Maureen A. Jones |
Vice President and Chief Financial Officer | |
| Christine M. Sloan |
Assistant Treasurer | |
| Geraldine H. Paré |
Assistant Secretary |
Stock Data
| Market Price (9/30/03) |
$ | 21.30 | |
| Net Asset Value (9/30/03) |
$ | 22.26 | |
| Discount: |
4.3% |
New York Stock Exchange and Pacific Exchange ticker symbol: PEO
NASDAQ Mutual Fund Quotation Symbol: XPEOX
Newspaper stock listings are generally under the abbreviation: PetRs
Distributions in 2003
| From Investment Income |
$ | 0.30 | |
| From Net Realized Gains |
0.09 | ||
| Total |
$ | 0.39 | |
2003 Dividend Payment Dates
March 1, 2003
June 1, 2003
September 1, 2003
December 27, 2003*
*Anticipated
THIRD QUARTER REPORT
September 30, 2003