PETROLEUM & RESOURCES CORPORATION - FORM N-30B - SEPTEMBER 30, 2014

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LETTER TO SHAREHOLDERS

 

 

 

Dear Fellow Shareholders,

 

Global oil prices retrenched in the third quarter, reflecting a perceived supply overhang, rising inventory levels and a stronger dollar. West Texas Intermediate (domestic) and Brent (international) crudes hit lows not seen in the past two years, declining 14% and 16%, respectively. Energy equities in the S&P declined 8.6% during the quarter, underperforming the 1.1% rise in the broader S&P 500 Index. This downdraft created opportunities in both sub-sectors and individual stocks during the quarter. Hess Corporation has benefited throughout the year, as the restructuring of the company has been rewarded by investors. We made a strategic decision to reduce our position into this strength. The quarter also brought with it difficulty for refiners. A short-term decline in refining margins caused that sub-sector to lag. As a result of this, we opportunistically added to our holdings in Marathon Petroleum. Marathon is a well-positioned refiner with an extensive transportation and distribution system that enables the company to optimize the supply of crude oil and other feedstocks into its large refining operation.

 

In Basic Materials, we established a new position in Packaging Corporation of America, a specialty packaging and display company. Recent consolidation in the containerboard industry provides a backdrop for increasing profitability. Additionally, a focus on the specialty end of the box/packaging market and rising internet shipping provides industry-leading margins and growth opportunities. The company is well managed, innovative and positioned to take advantage of positive trends.

 

For the nine months ended September 30, 2014, the total return on the Fund’s net asset value (“NAV”) per share (with dividends and capital gains reinvested) was 6.1%. The total return on the market price of the Fund’s shares for the period was 6.3%. These compare to a 0.8% total return for Lipper Global Natural Resources Funds Index over the same time period.

 

For the twelve months ended September 30, 2014, the Fund’s total return on NAV was 13.5% and on market price was 13.9%. The comparable return for the Lipper Global Natural Resources Funds Index was 4.1%.

 

Net assets of the Fund at September 30, 2014 were $33.87 per share on 26,652,593 shares outstanding, compared with $32.26 per share at December 31, 2013 on 26,775,228 shares outstanding. On March 3, 2014, a distribution of $0.10 per share was paid, consisting of $0.02 of net investment income, $0.02 of short-term capital gain, and $0.06 of long-term capital gain, all realized in 2013 and taxable in 2014. A 2014 net investment income dividend of $0.10 per share was paid June 2, 2014, and another $0.10 per share net investment income dividend was paid September 2, 2014. These constitute the first three payments toward our annual 6% minimum distribution rate commitment.

 

Net investment income for the nine months ended September 30, 2014 amounted to $10,062,955, compared with $8,420,706 for the same nine-month period in 2013, equal to $0.38 and $0.32 per share, respectively. Net capital gain realized on investments for the nine months ended September 30, 2014 amounted to $35,728,268, or $1.34 per share.

 

The Fund repurchased 135,000 shares of its Common Stock during the nine months ended September 30, 2014. The shares were repurchased at an average price of $28.65 and a weighted average discount to NAV of 15.0%, resulting in a $0.03 increase to NAV per share.

 

 

 

Investors can find the Fund’s daily NAV per share, the market price, the discount/premium to NAV per share, and quarterly changes in the portfolio securities on our website at www.peteres.com. Also available there are a history of the Fund, historical financial information, links for electronic delivery of shareholder reports, and other useful content.

 

By order of the Board of Directors,

LOGO

Mark E. Stoeckle

Chief Executive Officer

 

October 9, 2014


SUMMARY FINANCIAL INFORMATION

 

 

 

(unaudited)

 

     2014      2013  
At September 30:      

Net asset value per share

   $ 33.87       $ 31.94   

Market price per share

   $ 28.80       $ 27.06   

Shares outstanding

     26,652,593         26,125,310   

Total net assets

   $ 902,617,273       $ 834,456,154   

Unrealized appreciation on investments

   $ 407,165,374       $ 360,391,274   

For the nine months ended September 30:

     

Net investment income

   $ 10,062,955       $ 8,420,706   

Net realized gain

   $ 35,728,268       $ 29,434,265   

Cost of shares repurchased

   $ 3,867,668       $ 5,897,723   

Shares repurchased

     135,000         222,358   

Total return (based on market price)

     6.3%         14.4%   

Total return (based on net asset value)

     6.1%         16.1%   

Key ratios:

     

Net investment income to average net assets (annualized)

     1.48%         1.42%*   

Expenses to average net assets (annualized)

     0.62%         0.82%*   

Portfolio turnover (annualized)

     15.5%         20.8%   

Net cash & short-term investments to net assets

     0.9%         0.9%   

 

* The annualized ratios of net investment income and expenses to average net assets were 1.53% and 0.71%, respectively, after adjusting for non-recurring pension expenses.

 

 

FIVE YEAR DISTRIBUTION HISTORY

 

 

 

(unaudited)

 

    Year    

   Income
Dividends

Per Share
     Short-Term
Capital Gains

Distributions
Per Share
     Long-Term
Capital Gains

Distributions
Per Share
     Total
Dividends and
Distributions
Per Share
     Annual
Distribution
Rate*
 

2009

   $ 0.37       $ 0.14       $ 0.89       $ 1.40         6.6

2010

      0.32          0.19          0.76          1.27         5.5   

2011

      0.39          0.02          1.56          1.97         7.1   

2012

      0.42          0.01          1.17          1.60         6.4   

2013

      0.46          0.11          1.31          1.88         7.2   

 

* The annual distribution rate is the total dividends and distributions per share divided by the Fund’s average month-end stock price. For years prior to 2012, the average month-end stock price is determined for the calendar year. For 2012 and later, the average month-end stock price is determined for the twelve months ended October 31, which is consistent with the calculation used for the annual 6% minimum distribution rate commitment adopted in September 2012.

 


PORTFOLIO REVIEW

 

 

 

September 30, 2014

(unaudited)

 TEN LARGEST EQUITY PORTFOLIO HOLDINGS

 

      Market Value        % of Net Assets  

Exxon Mobil Corp.

   $ 127,760,342           14.2

Chevron Corp.

     88,678,624           9.8   

Schlumberger Ltd.

     56,946,400           6.3   

Halliburton Co.

     39,407,224           4.4   

Occidental Petroleum Corp.

     38,940,750           4.3   

LyondellBasell Industries N.V. (Class A)

     38,465,640           4.3   

EOG Resources, Inc.

     35,449,160           3.9   

Phillips 66

     35,066,970           3.9   

Dow Chemical Co.

     28,710,900           3.2   

Anadarko Petroleum Corp.

     27,896,000           3.1   
  

 

 

      

 

 

 

Total

   $ 517,322,010           57.4
  

 

 

      

 

 

 

 

 

INDUSTRY WEIGHTINGS

 

LOGO

 

3


SCHEDULE OF INVESTMENTS

 

 

 

September 30, 2014

(unaudited)

 

    Shares     Value (A)

Common Stocks  — 99.1%

   

Energy — 78.6%

   

Exploration & Production — 27.4%

Anadarko Petroleum Corp. (E)

    275,000      $ 27,896,000

Cabot Oil & Gas Corp.

    339,300        11,091,717

ConocoPhillips

    197,000        15,074,440

Energen Corp.

    165,000        11,919,600

EOG Resources, Inc.

    358,000        35,449,160

EQT Corp.

    140,000        12,815,600

Hess Corp.

    115,000        10,846,800

Marathon Oil Corp.

    571,000        21,463,890

Noble Energy, Inc.

    373,500        25,532,460

Oasis Petroleum, Inc. (C) (E)

    150,000        6,271,500

Occidental Petroleum Corp.

    405,000        38,940,750

Pioneer Natural Resources Co.

    99,500        19,598,515

Whiting Petroleum Corp. (C) (E)

    140,000        10,857,000
   

 

 

      247,757,432
   

 

 

Integrated Oil & Gas — 25.4%

   

Chevron Corp. (E)

    743,200        88,678,624

Exxon Mobil Corp. (F)

    1,358,430        127,760,342

Suncor Energy Inc.

    350,000        12,652,500
   

 

 

      229,091,466
   

 

 

   

Oil Equipment & Services — 18.1%

  

 

Baker Hughes, Inc.

    30,000        1,951,800

Ensco plc

    140,000        5,783,400

Halliburton Co. (E)

    610,870        39,407,224

Nabors Industries Ltd.

    480,000        10,924,800

National Oilwell Varco, Inc. (E)

    250,000        19,025,000

Oil States International Inc. (C)

    170,000        10,523,000

Schlumberger Ltd.

    560,000        56,946,400

Seadrill Ltd. (B)

    200,003        5,352,080

Weatherford International plc (C)

    645,000        13,416,000
   

 

 

      163,329,704
   

 

 

Pipelines — 2.6%

   

Kinder Morgan Inc.

    250,000        9,585,000

Williams Companies, Inc.

    250,000        13,837,500
   

 

 

      23,422,500
   

 

 

Refiners — 5.1%

   

Marathon Petroleum Corp.

    132,300        11,201,841

Phillips 66

    431,275        35,066,970
   

 

 

      46,268,811
   

 

 

Basic Materials — 20.5%

   

Chemicals — 16.7%

   

CF Industries Holdings, Inc. (E)

    84,069        23,473,746   

Dow Chemical Co. (E)

    547,500        28,710,900   

Eastman Chemical Co. (B)

    144,000        11,648,160   

FMC Corp.

    157,000        8,978,830   

LyondellBasell Industries N.V. (Class A)

    354,000        38,465,640   

Monsanto Co.

    194,400        21,871,944   

Praxair, Inc.

    134,500        17,350,500   
   

 

 

 
      150,499,720   
   

 

 

 

General Industrials — 1.1%

   

Packaging Corp. of America

    160,000        10,211,200   
   

 

 

 

Gold & Precious Metals — 0.6%

   

SPDR Gold Trust (C) (E)

    45,000        5,229,450   
   

 

 

 

Industrial Metals — 1.8%

   

Freeport-McMoRan Copper & Gold Inc.

    487,000        15,900,550   
   

 

 

 

Mining — 0.3%

   

Peabody Energy Corp.

    202,440        2,506,207   
   

 

 

 

Total Common Stocks
(Cost $487,010,159)

      894,217,040   
   

 

 

 

 


SCHEDULE OF INVESTMENTS (CONTINUED)

 

 

 

September 30, 2014

(unaudited)

 

    Principal /
Shares
    Value (A)

Short-Term Investments — 1.0%

Money Market Account — 1.0%

M&T Bank, 0.10%

  $ 8,841,461      $ 8,841,461

Money Market Funds — 0.0%

Fidelity Institutional Money Market - Money Market Portfolio (Institutional Class), 0.08% (D)

    100,000        100,000
   

 

 

Total Short-Term Investments
(Cost $8,941,461)

      8,941,461
   

 

 

Securities Lending Collateral — 0.4%

(Cost $4,137,344)

   

Money Market Funds — 0.4%

Invesco Short-Term Investment Trust - Liquid Assets Portfolio (Institutional Class), 0.06% (D)

    4,137,344        4,137,344
   

 

 

Total Investments — 100.5%
(Cost $500,088,964)

      907,295,845

Cash, receivables, prepaid expenses and other assets, less liabilities — (0.5)%

      (4,678,572)
   

 

 

Net Assets — 100.0%

    $ 902,617,273
   

 

 

 

Notes:

(A) Common Stocks are listed on the New York Stock Exchange or the NASDAQ and are valued at the last reported sale price on the day of valuation.
(B) A portion of shares held are on loan.
(C) Presently non-dividend paying.
(D) Rate presented is as of period-end and represents the annualized yield earned over the previous seven days.
(E) All or a portion of this security is pledged to cover open written call option contracts. Aggregate market value of such pledged securities is $31,816,600.
(F) All or a portion of this security is pledged to collateralize open written put option contracts with an aggregate market value to deliver upon exercise of $28,512,500.

 

 

 

This report is transmitted to the shareholders 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 Fund or of any securities mentioned in the report. The rates of return will vary and the principal value of an investment will fluctuate. Shares, if sold, may be worth more or less than their original cost. Past performance is no guarantee of future investment results.

 


OTHER INFORMATION

 

 

 

DIVIDEND PAYMENT SCHEDULE

 

The Fund 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, the net realized capital gains earned through October 31 and, if applicable, a return of capital. Shareholders may elect to receive the year-end distribution in stock or cash. In connection with this distribution, all shareholders of record are sent a dividend announcement notice and an election card in mid-November. Shareholders holding shares in “street” or brokerage accounts may make their elections by notifying their brokerage house representative.

 

STATEMENT ON QUARTERLY FILING OF COMPLETE PORTFOLIO SCHEDULE

 

In addition to publishing its complete schedule of portfolio holdings in the First and Third Quarter Reports to shareholders, the Fund also files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website: www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room, and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also posts a link to its Forms N-Q on its website: www.peteres.com under the headings “Investment Information”, “Financial Reports” and then “SEC Filings”.

 

PROXY VOTING POLICIES AND RECORD

 

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities owned by the Fund and the Fund’s proxy voting record for the 12-month period ended June 30, 2014 are available (i) without charge, upon request, by calling the Fund’s toll free number at (800) 638-2479; (ii) on the Fund’s website: www.peteres.com under the headings “About Petroleum & Resources” and “Corporate Information”; and (iii) on the Securities and Exchange Commission’s website: www.sec.gov.

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect the Fund’s actual results are the performance of the portfolio of stocks held by the Fund, the conditions in the U.S. and international financial, petroleum and other markets, the price at which shares of the Fund will trade in the public markets, and other factors discussed in the Fund’s periodic filings with the Securities and Exchange Commission.

 

6


OTHER INFORMATION (CONTINUED)

 

 

 

 

ELECTRONIC DELIVERY OF SHAREHOLDER REPORTS

 

The Fund offers shareholders the benefits and convenience of viewing Quarterly and Annual Reports and other shareholder materials on-line. With your consent, paper copies of these documents will cease with the next mailing and will be provided via e-mail. Reduce paper mailed to your home and help lower the Fund’s printing and mailing costs. To enroll, please visit the following websites:

 

Registered shareholders with AST: www.amstock.com/main

 

Shareholders using brokerage accounts: http://enroll.icsdelivery.com/PEO

 

PRIVACY POLICY

 

In order to conduct its business, the Fund, through its transfer agent, American Stock Transfer & Trust Company, collects and maintains certain nonpublic personal information about our shareholders of record with respect to their transactions in shares of our securities. This information includes the shareholder’s address, tax identification or Social Security number, share balances, and dividend elections. We do not collect or maintain personal information about shareholders whose shares of our securities are held in “street name” by a financial institution such as a bank or broker.

 

We do not disclose any nonpublic personal information about you, our other shareholders or our former shareholders to third parties unless necessary to process a transaction, service an account or as otherwise permitted by law.

 

To protect your personal information internally, we restrict access to nonpublic personal information about our shareholders to those employees who need to know that information to provide services to our shareholders. We also maintain certain other safeguards to protect your nonpublic personal information.

 

 

 

Petroleum & Resources Corporation

 

Seven St. Paul Street, Suite 1140, Baltimore, MD 21202

(410) 752-5900        (800) 638-2479

Website: www.peteres.com

E-mail: contact@peteres.com

 

Counsel: Chadbourne & Parke LLP

Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP

Custodian of Securities: Brown Brothers Harriman & Co.

Transfer Agent & Registrar: American Stock Transfer & Trust Company, LLC

Stockholder Relations Department

6201 15th Avenue

Brooklyn, NY 11219

(866) 723-8330

Website: www.amstock.com

E-mail: info@amstock.com

 

7

 


PETROLEUM & RESOURCES CORPORATION

 

 

Board Of Directors

 

Enrique R. Arzac 1,3,5

  Roger W. Gale 1,3,4,5

Phyllis O. Bonanno 1,2,5

  Kathleen T. McGahran 1,6

Kenneth J. Dale 2,3,4

  Craig R. Smith 1,2,5

Frederic A. Escherich 2,3,4

  Mark E. Stoeckle 1
1. Member of Executive Committee
2. Member of Audit Committee
3. Member of Compensation Committee
4. Member of Retirement Benefits Committee
5. Member of Nominating and Governance Committee
6. Chair of the Board

 

Officers

 

Mark E. Stoeckle

 

Chief Executive Officer

Nancy J.F. Prue, CFA

 

President

James P. Haynie, CFA

 

Executive Vice President

Brian S. Hook, CFA, CPA

 

Vice President,
Chief Financial Officer and Treasurer

Lawrence L. Hooper, Jr.

 

Vice President,
General Counsel and Secretary

Michael A. Kijesky, CFA

 

Vice President — Research

Michael E. Rega, CFA

 

Vice President — Research

Christine M. Sloan, CPA

 

Assistant Treasurer

 

Stock Data

 

Market Price (9/30/14)

   $ 28.80   

Net Asset Value (9/30/14)

   $ 33.87   
Discount:     15.0%  
         
New York Stock Exchange ticker symbol: PEO        

NASDAQ Quotation Symbol for NAV: XPEOX

         

 

 

Distributions in 2014

 

From Investment Income

   $ 0.22   

From Net Realized Gains

     0.08   
  

 

 

 

Total

   $ 0.30   
  

 

 

 

 

2014 Dividend Payment Dates

 March 3, 2014

June 2, 2014

September 2, 2014

December 29, 2014*

*Anticipated