ADAMS NATURAL RESOURCES FUND, INC. - FORM N-30B - MARCH 31, 2015

 

 

LOGO

ADAMS

NATURAL RESOURCES

FUND

 

 

 

 

 

 

Formerly Petroleum & Resources Corporation

 

 

 

FIRST QUARTER REPORT

MARCH 31, 2015


LETTER TO SHAREHOLDERS

 

 

Dear Fellow Shareholders,

 

Oil prices continued to decline following the collapse of 2014. Domestic crude prices, as measured by West Texas Intermediate, fell 10.5% in the first quarter. Energy stocks in the Dow Jones Oil and Gas Index fared better than the commodity price, losing 2.1%. Faced with the impact of lower prices, oil and gas companies slashed spending across the board, with many cutting jobs and share buyback programs. Drilling programs were scaled back, causing a 43% decline in the rig count. In addition to making necessary cost cuts, energy companies also needed to repay revolving credit lines and shore up balances sheets. Capital markets were surprisingly wide open for the sector. Debt issuances by U.S. exploration companies topped $12 billion and the U.S.-based majors borrowed $14 billion. Equity issuances raised another $10 billion for energy companies in the first three months.

 

During the quarter, the Fund initiated two new positions, Chesapeake Energy and Alcoa. Chesapeake is in the middle of a significant transformation. With new management in place, focused on capital discipline and operational improvement, the reasonable valuation offered an attractive opportunity. The company’s large acreage position is concentrated in top U.S. oil and natural gas plays from South Texas to Pennsylvania, including the Utica, Eagle Ford and Powder River Basins. We believe Chesapeake’s low acreage acquisition costs and solid operational performance will generate production growth and returns higher than Wall Street’s expectations.

 

In Basic Materials, Alcoa presented an attractive entry point. Alcoa historically was a high cost producer of basic aluminum and aluminum products. Recently, the company has streamlined its manufacturing operations, becoming very cost competitive on a global scale. Importantly, it has also developed a high return, high growth downstream products business selling into the lucrative aerospace and automotive markets, among others. This conversion allows the company to benefit from the recent trend toward light weight vehicles. Alcoa is the key supplier of aluminum parts to the Ford F-150, the best-selling truck in the U.S. Ford is replacing 95% of the steel in the body of the F-150 with aluminum.

 

For the three months ended March 31, 2015, the total return on the Fund’s net asset value (“NAV”) per share (with dividends and capital gains reinvested) was (2.8)%. The total return on the market price of the Fund’s shares for the period was (2.5)%. These compare to a (1.2)% total return for Lipper Global Natural Resources Funds Index over the same time period.

 

For the twelve months ended March 31, 2015, the Fund’s total return on NAV was (12.7)% and on market price was (10.7)%. The comparable return for the Lipper Global Natural Resources Funds Index was (18.2)%.

 

Net assets of the Fund at March 31, 2015 were $26.68 per share on 27,392,919 shares outstanding, compared with $27.56 per share at December 31, 2014 on 27,380,920 shares outstanding. On March 2, 2015, a distribution of $0.10 per share was paid, consisting of $0.02 net investment income and $0.06 long-term capital gain, realized in 2014, and $0.02 of net investment income realized in 2015, all taxable in 2015. On April 16, 2015, an investment income dividend of $0.10 per share was declared to shareholders of record May 13, 2015, payable June 1, 2015. These constitute the first two payments toward our annual 6% minimum distribution rate commitment.

 

By order of the Board of Directors,

 

LOGO

 

Mark E. Stoeckle

Chief Executive Officer

April 16, 2015

 


SUMMARY FINANCIAL INFORMATION

 

(unaudited)

 

     2015     2014  

At March 31:

    

Net asset value per share

     $26.68        $32.91   

Market price per share

     $23.15        $27.92   

Shares outstanding

     27,392,919        26,728,828   

Total net assets

     $730,854,522        $879,687,463   

Unrealized appreciation on investments

     $262,953,326        $398,697,899   

For the three months ended March 31:

    

Net investment income

     $3,249,069        $3,032,158   

Net realized (loss) gain

     $(5,845,156     $20,826,975   

Cost of shares repurchased

            $1,454,325   

Shares repurchased

            53,800   

Total return (based on market price)

     (2.5)%        2.4%   

Total return (based on net asset value)

     (2.8)%        2.4%   

Key ratios:

    

Net investment income to average net assets (annualized)

     1.76%        1.42%   

Expenses to average net assets (annualized)

     0.86%        0.68%   

Portfolio turnover (annualized)

     13.3%        27.9%   

Net cash & short-term investments to net assets

     0.6%        0.6%   

 

TEN LARGEST EQUITY PORTFOLIO HOLDINGS

 

 

March 31, 2015

(unaudited)

 

     Market Value      Percent
of Net Assets
 

Exxon Mobil Corp.

   $ 115,466,550         15.8

Chevron Corp.

     78,021,136         10.7   

Schlumberger Ltd.

     52,233,440         7.1   

Phillips 66

     33,898,215         4.6   

EOG Resources, Inc.

     32,825,020         4.5   

LyondellBasell Industries N.V. (Class A)

     30,308,560         4.1   

Occidental Petroleum Corp.

     29,565,000         4.0   

Dow Chemical Co.

     23,630,150         3.2   

CF Industries Holdings, Inc.

     22,827,446         3.1   

Anadarko Petroleum Corp.

     22,772,750         3.1   
  

 

 

    

 

 

 

Total

   $ 441,548,267             60.2
  

 

 

    

 

 

 

 

1


SCHEDULE OF INVESTMENTS

 

 

March 31, 2015 (unaudited)

 

    Shares     Value (A)  

Common Stocks — 99.4%

  

 

Energy — 78.9%

  

Exploration & Production — 26.3%

  

Anadarko Petroleum Corp.

    275,000      $ 22,772,750   

Chesapeake Energy Corp. (B)

    452,000        6,400,320   

Cimarex Energy Co.

    108,000        12,429,720   

ConocoPhillips

    213,000        13,261,380   

Energen Corp.

    129,600        8,553,600   

EOG Resources, Inc.

    358,000        32,825,020   

EQT Corp.

    140,000        11,601,800   

Marathon Oil Corp.

    571,000        14,908,810   

Noble Energy, Inc.

    373,500        18,264,150   

Occidental Petroleum Corp.

    405,000        29,565,000   

Pioneer Natural Resources Co. (E)

    99,500        16,269,245   

Whiting Petroleum Corp. (C)

    174,500        5,392,050   
   

 

 

 
       192,243,845   
   

 

 

 

Integrated Oil & Gas — 27.9%

  

Chevron Corp.

    743,200        78,021,136   

Exxon Mobil Corp.

    1,358,430        115,466,550   

Suncor Energy Inc.

    350,000        10,237,500   
   

 

 

 
      203,725,186   
   

 

 

 
   

Oil Equipment & Services — 13.8%

  

Baker Hughes, Inc.

    160,000        10,172,800   

Ensco plc (Class A)

    140,000        2,949,800   

Halliburton Co.

    145,070        6,365,672   

National Oilwell Varco, Inc.

    250,000        12,497,500   

Oil States International Inc. (C)

    170,000        6,760,900   

Schlumberger Ltd.

    626,000        52,233,440   

Seadrill Ltd. (B)

    200,003        1,870,028   

Weatherford International plc (C)

    645,000        7,933,500   
   

 

 

 
      100,783,640   
   

 

 

 

Pipelines — 4.4%

  

Kinder Morgan Inc.

    469,000        19,726,140   

Williams Companies, Inc.

    250,000        12,647,500   
   

 

 

 
      32,373,640   
   

 

 

 

Refiners — 6.5%

  

Marathon Petroleum Corp.

    132,300        13,546,197   

Phillips 66

    431,275        33,898,215   
   

 

 

 
      47,444,412   
   

 

 

 

 

2


SCHEDULE OF INVESTMENTS (CONTINUED)

 

 

March 31, 2015

(unaudited)

 

    Shares/
Principal
    Value (A)  

Basic Materials — 20.5%

   

Chemicals — 17.5%

  

Alcoa Inc.

    614,000      $ 7,932,880   

CF Industries Holdings, Inc. (E)

    80,469        22,827,446   

Dow Chemical Co.

    492,500        23,630,150   

Eastman Chemical Co.

    140,000        9,696,400   

LyondellBasell Industries N.V. (Class A)

    345,200        30,308,560   

Monsanto Co.

    194,400        21,877,776   

Praxair, Inc.

    97,300        11,748,002   
   

 

 

 
      128,021,214   
   

 

 

 

General Industrials — 1.7%

  

Packaging Corp. of America

    156,300        12,221,097   

Gold & Precious Metals — 0.7%

  

SPDR Gold Trust (C) (E)

    45,000        5,114,700   

Industrial Metals — 0.6%

  

Freeport-McMoRan Copper & Gold Inc.

    248,000        4,699,600   
   

 

 

 

Total Common Stocks
(Cost $463,758,556)

   

    726,627,334   
   

 

 

 

Short-Term Investments — 0.5%

  

 

Money Market Account — 0.5%

  

 

M&T Bank, 0.10%

  $ 3,265,097        3,265,097   

Money Market Funds — 0.0%

  

 

Fidelity Institutional Money Market – Money Market Portfolio (Institutional Class), 0.14% (D)

    100,000        100,000   
   

 

 

 
   

Total Short-Term Investments
(Cost $3,365,097)

      3,365,097   
   

 

 

 

Securities Lending Collateral — 1.1%
(Cost $8,005,980)

   

Money Market Funds — 1.1%

  

Invesco Short-Term Investment Trust – Liquid Assets Portfolio (Institutional Class), 0.08% (D)

    8,005,980        8,005,980   
   

 

 

 

Total Investments — 101.0%
(Cost $475,129,633)

      737,998,411   

Liability for open written option contracts — 0.0%

      (11,800

Other assets less liabilities — (1.0)%

  

    (7,132,089
   

 

 

 

Net Assets — 100.0%

    $ 730,854,522   
   

 

 

 

 

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 $9,831,150.

 

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4


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 and the net realized capital gain 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 election 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.adamsfunds.com; select Fund name and click the headings “Investment Information”, “Financial Reports” and then “SEC Filings”.

 

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.

 

Website Information

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.adamsfunds.com. Also available there are a history of the Fund, historical financial information, links for electronic delivery of shareholder reports, and other useful content.

 

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

 

This report is transmitted to the shareholders of Adams Natural Resources Fund 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.

 

5


ADAMS NATURAL RESOURCES FUND

 

 

 

Board of Directors

 

Enrique R. Arzac 1,3,5

 

Frederic A. Escherich 2,3,4

 

Craig R. Smith 1,2,5

Phyllis O. Bonanno 1,2,5

 

Roger W. Gale 1,3,4,5

 

Mark E. Stoeckle 1

Kenneth J. Dale 2,3,4

 

Kathleen T. McGahran 1,6

 

 

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

James P. Haynie, CFA

 

President

Nancy J. F. Prue, CFA

 

Executive Vice President, Director of Shareholder Communications

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

 

 

 

500 East Pratt Street, Suite 1300, Baltimore, MD 21202

(410) 752-5900          (800) 638-2479

Website: www.adamsfunds.com

E-mail: contact@adamsfunds.com

Tickers: PEO (NYSE), XPEOX (NASDAQ)

 

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

Email: info@amstock.com