UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-02736
---------------------------------------------
PETROLEUM & RESOURCES CORPORATION
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(Exact name of registrant as specified in charter)
7 Saint Paul Street, Suite 1140, Baltimore, Maryland 21202
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(Address of principal executive offices) (Zip code)
Lawrence L. Hooper, Jr.
Petroleum & Resources Corporation
7 Saint Paul Street
Suite 1140
Baltimore, Maryland 21202
Registrant's telephone number, including area code: 410-752-5900
Date of fiscal year end: December 31, 2005
Date of reporting period: June 30, 2005
Item 1: Reports to Stockholders.
PETROLEUM & RESOURCES CORPORATION
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Board of Directors
Enrique R. Arzac/ 1,3/ Kathleen T. McGahran /2,4/
Phyllis O. Bonanno /1,3/ Douglas G. Ober/ 1/
Daniel E. Emerson/ 3,4 / John J. Roberts/ 1,4/
Thomas H. Lenagh/ 1,4/ Susan C. Schwab/ 2,4/
W.D. MacCallan/ 2,3/ Robert J.M. Wilson /1,2/
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
Lawrence L. Hooper, Jr. Vice President,
General Counsel and
Secretary
Maureen A. Jones Vice President,
Chief Financial Officer
and Treasurer
Nancy J.F. Prue Vice President
Christine M. Sloan Assistant Treasurer
Geraldine H. Pare Assistant Secretary
--------
Stock Data
--------
Market Price (6/30/05) $29.95
Net Asset Value (6/30/05) $32.59
Discount: 8.1%
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 2005
----------------
From Investment Income (paid or declared) $0.31
From Net Realized Gains 0.08
-----
Total $0.39
=====
-----------------------
2005 Dividend Payment Dates
-----------------------
March 1, 2005
June 1, 2005
September 1, 2005
December 27, 2005*
*Anticipated
[GRAPHIC]
Semi-Annual Report
June 30,2005
LETTER TO STOCKHOLDERS
--------------------------------------------------------------------------------
We submit herewith the audited financial statements of the Corporation for the
six months ended June 30, 2005. In addition, there is the report of the
independent registered public accounting firm, a schedule of investments, along
with other financial information.
Net assets of the Corporation at June 30, 2005 were $32.59 per share on
21,642,506 shares outstanding, compared with $28.16 per share at December 31,
2004 on 21,979,676 shares outstanding. On March 1, 2005, a distribution of
$0.13 per share was paid, consisting of $0.06 from 2004 long-term capital gain,
$0.02 from 2004 short-term capital gain, $0.03 from 2004 investment income and
$0.02 from 2005 investment income, all taxable in 2005. A 2005 investment
income dividend of $0.13 per share was paid on June 1, 2005 and another $0.13
investment income dividend has been declared to shareholders of record August
16, 2005, payable on September 1, 2005.
Net investment income for the six months ended June 30, 2005 amounted to
$4,338,847, compared with $4,645,489 for the same period in 2004. These
earnings are equal to $0.20 and $0.21 per share on the average number of shares
outstanding during each period.
Net capital gain realized on investments for the six months ended June 30, 2005
amounted to $10,320,850, the equivalent of $0.48 per share.
The Annual Meeting, held on April 27, 2005 in Baltimore, was well attended. The
results of the voting at the Annual Meeting are shown on page 17.
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 website (www.peteres.com). Also available
at the website are a brief history of the Corporation, historical financial
information, and other useful information. Further information regarding
shareholder services is located on page 18 of this report.
-----------------
Mr. W. Perry Neff retired from the Board of Directors in April 2005. Mr. Neff
was elected to the board in 1971 when he was Executive Vice President and
Senior Operating Officer of Chemical Bank. Over the years, he has generously
shared with us his extensive financial knowledge and wisdom. We wish him well
in his retirement and thank him for his thirty-four years of distinguished
service as a director.
We are pleased to announce effective April 27, 2005, the Board of Directors
elected Ms. Nancy J.F. Prue to Vice President of the Corporation. Ms. Prue had
been the Vice President-Research with the Corporation since 1986 and a research
analyst since 1982.
-----------------
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,
/s/ DOUGLAS G. OBER
Douglas G. Ober,
Chairman, President and
Chief Executive Officer
July 20, 2005
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
June 30, 2005
Assets
Investments* at value:
Common stocks and convertible securities
(cost $298,867,068) $661,561,765
Short-term investments (cost $42,530,767) 42,530,767 $704,092,532
--------------------------------------------------------------------------------------------
Cash 286,592
Receivables:
Investment securities sold 1,170,453
Dividends and interest 605,833
Prepaid pension cost 1,215,666
Prepaid expenses and other assets 463,605
--------------------------------------------------------------------------------------------------------
Total Assets 707,834,681
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Liabilities
Investment securities purchased 367,530
Open written option contracts at value (proceeds $320,623) 330,251
Accrued expenses 1,911,921
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Total Liabilities 2,609,702
--------------------------------------------------------------------------------------------------------
Net Assets $705,224,979
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Net Assets
Common Stock at par value $1.00 per share, authorized 50,000,000 shares;
issued and outstanding 21,642,506 shares (includes 4,630 restricted shares
and restricted stock units for 3,600 shares) (Note 6) $ 21,642,506
Additional capital surplus 309,623,767
Undistributed net investment income 950,145
Undistributed net realized gain on investments 10,323,492
Unrealized appreciation on investments 362,685,069
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Net Assets Applicable to Common Stock $705,224,979
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Net Asset Value Per Share of Common Stock $32.59
--------------------------------------------------------------------------------------------------------
* See Schedule of Investments on pages 9 and 10.
The accompanying notes are an integral part of the financial statements.
2
STATEMENT OF OPERATIONS
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Six Months Ended June 30, 2005
Investment Income
Income:
Dividends $ 5,704,049
Interest and other income 650,004
-------------------------------------------------------------------------------------
Total Income 6,354,053
-------------------------------------------------------------------------------------
Expenses:
Investment research 906,225
Administration and operations 502,111
Directors' fees 150,169
Reports and stockholder communications 88,703
Transfer agent, registrar and custodian expenses 65,135
Auditing and accounting services 42,288
Legal services 59,982
Occupancy and other office expenses 118,781
Travel, telephone and postage 36,126
Other 45,686
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Total Expenses 2,015,206
-------------------------------------------------------------------------------------
Net Investment Income 4,338,847
-------------------------------------------------------------------------------------
Realized Gain and Change in Unrealized Appreciation on Investments
Net realized gain on security transactions 10,320,850
Change in unrealized appreciation on investments 87,262,178
-------------------------------------------------------------------------------------
Net Gain on Investments 97,583,028
-------------------------------------------------------------------------------------
Change in Net Assets Resulting from Operations $101,921,875
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The accompanying notes are an integral part of the financial statements.
3
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 2005 December 31, 2004
---------------- -----------------
From Operations:
Net investment income $ 4,338,847 $ 8,924,453
Net realized gain on investments 10,320,850 18,979,327
Change in unrealized appreciation on investments 87,262,178 90,350,341
-------------------------------------------------------------------------------------------
Change in net assets resulting from operations 101,921,875 118,254,121
-------------------------------------------------------------------------------------------
Distributions to Stockholders from:
Net investment income (3,927,869) (9,536,803)
Net realized gain from investment transactions (1,756,892) (19,037,472)
-------------------------------------------------------------------------------------------
Decrease in net assets from distributions (5,684,761) (28,574,275)
-------------------------------------------------------------------------------------------
From Capital Share Transactions:
Value of shares issued in payment of distributions -- 9,629,174
Cost of shares purchased (Note 4) (9,923,590) (3,362,898)
Deferred compensation (Notes 4,6) 24,054 --
-------------------------------------------------------------------------------------------
Change in net assets from capital share transactions (9,899,536) 6,266,276
-------------------------------------------------------------------------------------------
Total Increase in Net Assets 86,337,578 95,946,122
Net Assets:
Beginning of period 618,887,401 522,941,279
-------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $950,145 and $746,047, respectively) $705,224,979 $618,887,401
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The accompanying notes are an integral part of the financial statements.
4
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 at June 30, 2005 was $341,368,012, and net unrealized appreciation
aggregated $362,724,520, of which the related gross unrealized appreciation and
depreciation were $367,793,174 and $5,068,654, 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
The Corporation's investment decisions are made by a committee of management,
and recommendations to that committee are made by the research staff.
Purchases and sales of portfolio securities, other than options and short-term
investments, during the six months ended June 30, 2005 were $38,847,355 and
$45,567,142, respectively. Options may be written (sold) or purchased by the
Corporation. The Corporation, as writer of an option, bears the risk of
possible illiquidity of the option markets and from movements in security
values. The risk associated with purchasing an option is limited to the premium
originally paid. A schedule of outstanding option contracts as of June 30, 2005
can be found on page 12.
Transactions in written covered call and collateralized put options during the
six months ended June 30, 2005 were as follows:
Covered Calls Collateralized Puts
------------------- -------------------
Contracts Premiums Contracts Premiums
--------- --------- --------- ---------
Options outstanding,
December 31, 2004 1,550 $ 204,167 1,470 $ 167,283
Options written 4,240 429,506 2,850 259,845
Options terminated in
closing purchase
transactions (910) (73,079) -- --
Options expired (650) (80,987) (3,160) (310,757)
Options exercised (2,330) (275,355) -- --
---------------------------------------------------------------
Options outstanding,
June 30, 2005 1,900 $ 204,252 1,160 $ 116,371
---------------------------------------------------------------
4. CAPITAL STOCK
The Corporation has 5,000,000 authorized and unissued preferred shares without
par value.
On December 27, 2004, the Corporation issued 380,149 shares of its Common Stock
at a price of $25.33 per share (the average market price on December 13, 2004)
to stockholders of record on November 23, 2004 who elected to take stock in
payment of the year-end distribution from 2004 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.
5
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Transactions in Common Stock for 2005 and 2004 were as follows:
Shares Amount
---------------------- ------------------------
Six months Six months
ended Year ended ended Year ended
June 30, December 31, June 30, December 31,
2005 2004 2005 2004
---------- ------------ ----------- ------------
Shares issued in
payment of
dividends -- 380,149 $ -- $ 9,629,174
Shares purchased
(at a weighted
average discount
from net asset
value of 7.8%
and 8.0%,
respectively) (345,400) (137,250) (9,923,590) (3,362,898)
Nonvested shares/units
granted under the
equity incentive
compensation plan 8,230 -- 24,054 --
------------------------------------------------------------------------
Net change (337,170) 242,899 $(9,899,536) $ 6,266,276
------------------------------------------------------------------------
5. RETIREMENT PLANS
The Corporation's qualified defined benefit pension plan covers all employees
with at least one year of service. In addition, the Corporation has a
nonqualified defined benefit plan which provides eligible employees with
retirement benefits to supplement the qualified plan. Benefits are based on
length of service and compensation during the last five years of employment.
The Corporation's policy is to contribute annually to the plans those amounts
that can be deducted for federal income tax purposes, plus additional amounts
as the Corporation deems appropriate in order to provide assets sufficient to
meet benefits to be paid to plan participants. During the six months ended June
30, 2005, the Corporation contributed $437,338 to the plans. The Corporation
anticipates contributing additional amounts to the plans approximating $23,338
during the remainder of 2005.
The following table aggregates the components of the plans' net periodic
pension cost for the six months ended June 30, 2005.
Service Cost $ 92,584
Interest Cost 140,544
Expected return on plan assets (138,746)
Amortization of prior service cost 27,457
Amortization of net loss 90,123
---------------------------------------------
Net periodic pension cost $ 211,962
---------------------------------------------
The Corporation also sponsors a defined contribution plan that covers
substantially all employees. For the six months ended June 30, 2005, the
Corporation expensed contributions of $41,543. The Corporation does not provide
postretirement medical benefits.
6. Stock-Based Compensation
The Stock Option Plan adopted in 1985 ("1985 Plan") permits the issuance of
stock options and stock appreciation rights for the purchase of up to 895,522
shares of the Corporations's Common Stock at the fair market value on the date
of grant. The exercise price of the options and related stock appreciation
rights is reduced by the per share amount of capital gains paid by the
Corporation during subsequent years. Options are exercisable beginning not less
than one year after the date of grant and stock appreciation rights are
exercisable beginning not less than two years after the date of grant. The
stock appreciation rights allow the holders to surrender their rights to
exercise their options and receive cash in an amount equal to the difference
between the option exercise price and the fair market value of the Common Stock
at the date of surrender. All options terminate 10 years from the date of grant
if not exercised. With the adoption of the 2005 Equity Incentive Compensation
Plan ("2005 Plan") at the 2005 Annual Meeting, no further grants will be made
under the 1985 Plan, although unexercised awards granted in 2004 and prior
years remain outstanding.
A summary of option activity under the 1985 Plan as of June 30, 2005, and
changes during the period then ended is presented below:
Weighted- Weighted-
Average Average
Exercise Remaining
Options Price Life (Years)
- ------- --------- ------------
Outstanding at January 1, 2005 128,543 $18.81
Exercised (17,261) 15.93
Forfeited -- --
--------------------------------------------------------------
Outstanding at June 30, 2005 111,282 $19.17 5.45
--------------------------------------------------------------
Exercisable at June 30, 2005 50,108 $19.02 5.16
--------------------------------------------------------------
The options outstanding as of June 30, 2005 are set forth below:
Weighted Weighted
Average Average
Options Exercise Remaining
Exercise Price Outstanding Price Life (Years)
-------------- ----------- -------- ------------
$14.00-$16.49 21,317 $14.44 1.52
$16.50-$18.99 34,303 17.53 0.78
$19.00-$21.49 23,921 20.83 4.17
$21.50-$24.00 31,741 22.87 3.14
--------------------------------------------------------------
Outstanding at June 30, 2005 111,282
--------------------------------------------------------------
Compensation cost resulting from stock options and stock appreciation rights
granted under the 1985 Plan is based on the intrinsic value of the award,
recognized over the award's vesting period, and remeasured at each reporting
6
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
date through the date of settlement. The total compensation cost recognized for
the six months ended June 30, 2005 was $470,783.
The 2005 Plan permits the grant of stock options, restricted stock awards and
other stock incentives to key employees and all non-employee directors. The
2005 Plan provides for the issuance of up to 872,639 shares of the
Corporation's Common Stock. Restricted stock was granted to key employees on
April 27, 2005 at fair market value on that date, vesting over a three year
period. Restricted stock units were granted to non-employee directors on April
27, 2005 at fair market value on that date and vest over a one year period. The
number of shares of Common Stock which remain available for future grants under
the Plan at June 30, 2005 is 864,409 shares. The Corporation pays dividends and
dividend equivalents on outstanding awards, which are charged to net assets
when paid. Dividends and dividend equivalents paid on awards that are later
forfeited are reclassified to compensation expense.
A summary of the status of the Corporations's awards granted as of June 30,
2005, and changes during the period then ended is presented below:
Shares/ Grant-Date Fair
Awards Units Value
------ ------- ---------------
Balance at January 1, 2005 -- --
Granted:
Restricted stock 4,630 $28.06
Restricted stock units 3,600 28.06
Vested -- --
Forfeited -- --
--------------------------------------------------
Nonvested at June 30, 2005 8,230 $28.06
Compensation costs resulting from restricted stock and restricted stock units
granted under the 2005 Plan are recognized over the relevant service period
based on the fair value of the awards granted. Any unearned compensation is
included in "Undistributed net investment income" and is subsequently expensed
as services are rendered. The fair value of restricted shares is based on the
average of the high and low market price on the date an award is granted. The
total compensation costs for restricted stock granted to employees for the six
months ended June 30, 2005 was $7,218. The total compensation costs for
restricted stock units granted to non-employee directors under the 2005 Plan
for the six months ended June 30, 2005 was $16,836. As of June 30, 2005, there
was $206,880 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the 2005 Plan. That cost is
expected to be recognized over a weighted average period of 2.0 years.
7. EXPENSES
The aggregate remuneration paid or accrued during the six months ended June 30,
2005 to officers and directors amounted to $907,946, of which $150,169 was paid
as fees to directors who were not officers.
8. 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 June 30, 2005, the Corporation had no securities
on loan.
7
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
------------------
Six Months Ended
-----------------
Year Ended December 31
June 30, June 30, --------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net asset value, beginning of period $28.16 $24.06 $24.06 $20.98 $24.90 $32.69 $26.32
------------------------------------------------------------------------------------------------------------
Net investment income 0.20 0.21 0.41 0.38 0.42 0.49 0.37
Net realized gains and increase (decrease)
in unrealized appreciation 4.45 2.20 5.05 3.89 (3.20) (6.81) 7.67
------------------------------------------------------------------------------------------------------------
Total from investment operations 4.65 2.41 5.46 4.27 (2.78) (6.32) 8.04
------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.18) (0.17) (0.44) (0.38) (0.43) (0.43) (0.39)
Distributions from net realized gains (0.08) (0.09) (0.88) (0.81) (0.68) (1.07) (1.35)
------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.26) (1.32) (1.19) (1.11) (1.50) (1.74)
------------------------------------------------------------------------------------------------------------
Capital share repurchases 0.04 0.01 0.01 0.02 0.01 0.06 0.28
Reinvestment of distributions -- -- (0.05) (0.02) (0.04) (0.03) (0.21)
------------------------------------------------------------------------------------------------------------
Total capital share transactions 0.04 0.01 (0.04) 0.00 (0.03) 0.03 0.07
------------------------------------------------------------------------------------------------------------
Net asset value, end of period $32.59 $26.22 $28.16 $24.06 $20.98 $24.90 $32.69
------------------------------------------------------------------------------------------------------------
Per share market price, end of period $29.95 $23.81 $25.78 $23.74 $19.18 $23.46 $27.31
Total Investment Return
Based on market price 17.2% 1.4% 14.4% 30.8% (13.7)% (8.7)% 36.1%
Based on net asset value 16.8% 10.2% 23.3% 21.2% (11.1)% (19.0)% 33.1%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $705,225 $568,508 $618,887 $522,941 $451,275 $526,492 $688,173
Ratio of expenses to average net assets 0.61%+ 0.50%+ 0.56% 0.74% 0.49% 0.35% 0.59%
Ratio of net investment income to
average net assets 1.30%+ 1.73%+ 1.58% 1.75% 1.84% 1.67% 1.24%
Portfolio turnover 12.61%+ 13.31%+ 13.44% 10.20% 9.69% 6.74% 7.68%
Number of shares outstanding at
end of period (in 000's) 21,643 21,682 21,980 21,737 21,510 21,148 21,054
------------------
--------
+Ratios presented on an annualized basis.
8
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
June 30, 2005
Shares Value (A)
--------- ------------
Stocks And Convertible Securities -- 93.8%
Energy -- 83.8%
Internationals -- 25.2%
BP plc ADR 600,000 $ 37,428,000
Chevron Corp. 635,000 35,509,200
Exxon Mobil Corp. 1,140,000 65,515,800
Royal Dutch Petroleum Co. ADR 385,000 24,986,500
Total S.A. ADR 120,000 14,022,000
------------
177,461,500
------------
Domestics -- 10.5%
Amerada Hess Corp. 75,000 7,988,250
ConocoPhillips 560,000 32,194,400
Holly Corp. 225,000 10,500,750
Kerr-McGee Corp. 117,647 8,977,642
Murphy Oil Corp. 276,400 14,436,372
------------
74,097,414
------------
Producers -- 18.3%
Apache Corp. 177,000 11,434,200
Burlington Resources Inc. 246,800 13,633,232
Devon Energy Corp. 355,000 17,991,400
EOG Resources, Inc. 360,000 20,448,000
Newfield Exploration Co. (B) 170,000 6,781,300
Noble Energy, Inc. 215,000 16,264,750
Occidental Petroleum Corp. 200,000 15,386,000
Pioneer Natural
Resources Co. 291,000 12,245,280
XTO Energy Inc. 428,333 14,559,038
------------
128,743,200
------------
Distributors -- 13.6%
AGL Resources Inc. 250,000 9,662,500
Duke Energy Corp. 217,624 6,469,962
Energen Corp. 400,000 14,020,000
Equitable Resources Inc. 225,000 15,300,000
Keyspan Corp. 70,000 2,849,000
MDU Resources Group, Inc. 250,000 7,042,500
National Fuel Gas Co. 200,000 5,782,000
New Jersey Resources Corp. 277,500 13,389,375
Questar Corp. 200,000 13,180,000
Williams Companies, Inc. 450,000 8,550,000
------------
96,245,337
------------
Shares Value (A)
------- ------------
Services -- 16.2%
Baker Hughes, Inc. 130,000 $ 6,650,800
BJ Services Co. 370,000 19,417,600
GlobalSantaFe Corp. 290,000 11,832,000
Grant Prideco Inc. (B) 308,000 8,146,600
Nabors Industries Ltd. (B) 260,000 15,761,200
Noble Corp. (B) 185,000 11,379,350
Precision Drilling Corp. (B) 200,000 7,896,000
Schlumberger Ltd. 280,000 21,263,200
Weatherford International,
Ltd. (B) 205,000 11,885,900
------------
114,232,650
------------
Basic Industries -- 10.0%
Basic Materials & Other -- 9.6%
Air Products and Chemicals, Inc. 125,000 7,537,500
Aqua America, Inc. 315,000 9,368,100
Arch Coal Inc. 90,000 4,902,300
Consol Energy Inc. 158,700 8,503,146
du Pont (E.I.) de Nemours and Co. 175,000 7,526,750
General Electric Co. 454,800 15,758,820
Martin Marietta Materials, Inc. 70,400 4,866,048
Rohm & Haas Co. 200,000 9,268,000
------------
67,730,664
------------
Paper & Forest Products -- 0.4%
Smurfit-Stone Container Corp. (B) 300,000 3,051,000
------------
Total Stocks And Convertible Securities
(Cost $298,867,068) (C) $661,561,765
------------
9
SCHEDULE OF INVESTMENTS (continued)
--------------------------------------------------------------------------------
June 30, 2005
Prin. Amt. Value (A)
----------- -----------
Short-Term Investments -- 6.0%
U.S. Government Obligations -- 2.1%
U.S. Treasury Bills,
2.77%, due 8/18/05 $15,000,000 $14,944,000
-----------
Time Deposit -- 0.0%
Brown Brothers Harriman & Co.,
2.70%, due 7/1/05 13,812
-----------
Commercial Paper -- 3.9%
AIG Funding Inc.,
2.93%, due 7/5/05 5,000,000 4,998,372
American General Finance Corp.,
3.25%, due 7/28/05 1,675,000 1,670,917
Chevron Corp.,
2.92%, due 7/7/05 2,750,000 2,748,662
ChevronTexaco Funding Corp.,
3.10%, due 7/19/05 4,185,000 4,178,513
Prin. Amt. Value (A)
---------- ------------
General Electric Capital Corp.,
2.99-3.25%, due 7/14/05-
7/28/05 $7,000,000 $ 6,985,166
Toyota Motor Credit Corp.,
2.95-3.24%, due 7/7/05-
7/26/05 7,000,000 6,991,325
------------
29,572,955
------------
Total Short-Term Investments
(Cost $42,530,767) 42,530,767
------------
Total Investments -- 99.8%
(Cost $341,397,835) 704,092,532
Cash, receivables and other
assets, less liabilities -- 0.2% 1,132,447
------------
Net Assets -- 100.0% $705,224,979
============
--------------------------------------------------------------------------------
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) Presently non-dividend paying.
(C) The aggregate market value of stocks held in escrow at June 30, 2005
covering open call option contracts written was $12,778,600. In addition,
the aggregate market value of securities segregated by the Corporation's
custodian required to collateralize open put option contracts written was
$4,992,500.
10
PORTFOLIO SUMMARY
--------------------------------------------------------------------------------
TEN LARGEST PORTFOLIO HOLDINGS (6/30/05)
Market Value % of Net Assets
----------------------------------------------------------
Exxon Mobil Corp. $ 65,515,800 9.3
BP plc ADR 37,428,000 5.3
Chevron Corp. 35,509,200 5.0
ConocoPhillips 32,194,400 4.6
Royal Dutch Petroleum Co. ADR 24,986,500 3.5
Schlumberger Ltd. 21,263,200 3.0
EOG Resources, Inc. 20,448,000 2.9
BJ Services Co. 19,417,600 2.8
Devon Energy Corp. 17,991,400 2.6
Noble Energy, Inc. 16,264,750 2.3
------------ ---
Total $291,018,850 41.3%
------------ ---
SECTOR WEIGHTINGS (6/30/05)
[CHART]
Internationals 25.2%
Domestics 10.5%
Producers 18.3%
Distributors 13.6%
Services 16.2%
Basic Materials & Other 9.6%
Paper & Forest Products 0.4%
Cash & Equivalent 6.0%
11
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
--------------------------------------------------------------------------------
June 30, 2005
Contracts Contract
(100 shares Strike Expiration Appreciation/
each) Security Price Date (Depreciation)
-------------------------------------------------------------------------------------------
COVERED CALLS
100 Air Products & Chemicals, Inc. $ 65 Sep 05................ $ 2,700
100 Amerada Hess Corp............. 110 Aug 05 (18,301)
200 Chevron Corp.................. 65 Sep 05................ 14,399
400 ConocoPhillips................ 65 Au g 05 3,499
100 Kerr-McGee Corp............... 75 Jul 05................ (6,301)
100 Kerr-McGee Corp............... 80 Oct 05................ (4,801)
200 Kerr-McGee Corp............... 95 Oct 05................ 26,958
200 Martin Marietta Materials,
Inc........................... 70 Oct 05................ (33,601)
200 Murphy Oil Corp............... 50 Jul 05................ (46,300)
200 Murphy Oil Corp............... 60 Oct 05................ (12,300)
100 Total S.A. ADR................ 135 Aug 05 8,800
----- --------
1,900 (65,248)
----- --------
COLLATERALIZED PUTS
250 Exxon Mobil Corp.............. 55 Jul 05................ 15,499
200 Exxon Mobil Corp.............. 50 Oct 05................ 13,399
60 Holly Corp.................... 30 Sep 05................ 3,120
100 Martin Marietta Materials,
Inc........................... 45 Jul 05................ 9,977
300 Murphy Oil Corp............... 35 Jul 05................ 15,626
250 Newfield Exploration Co....... 37.50 Sep 05................ (2,001)
----- --------
1,160 55,620
----- --------
$ (9,628)
========
12
CHANGES IN PORTFOLIO SECURITIES
--------------------------------------------------------------------------------
During the Three Months Ended June 30, 2005
(unaudited)
Shares
--------------------------------------
Held
Additions Reductions June 30, 2005
--------- ---------- -------------
ConocoPhillips.......................... 280,000/(1)/ 560,000
Energen Corp............................ 200,000/(1)/ 400,000
Exxon Mobil Corp........................ 20,000 1,140,000
GlobalSantaFe Corp...................... 35,000 290,000
Holly Corp.............................. 109,900 40,000 225,000
Murphy Oil Corp......................... 168,200/(1)/ 74,500 276,400
Nabors Industries Ltd................... 45,000 260,000
Newfield Exploration Co................. 170,000 170,000
Precision Drilling Corp................. 168,000/(2)/ 200,000
XTO Energy Inc.......................... 95,000 428,333
Amerada Hess Corp....................... 10,000 75,000
Apache Corp............................. 13,000 177,000
Arch Coal Inc........................... 10,000 90,000
Devon Energy Corp....................... 42,440 355,000
Kerr-McGee Corp......................... 59,506 117,647
--------
/(1)/ By stock split.
/(2)/ Received 100,000 shares by stock split.
-----------------
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 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 not indicative of future investment results.
13
HISTORICAL FINANCIAL STATISTICS
--------------------------------------------------------------------------------
Dividends Distributions
Net from from
Asset Net Investment Net Realized
Value of Shares Value per Income Gains
December 31 Net Assets Outstanding* Share* per Share* per Share*
----------- ------------ ------------ --------- -------------- -------------
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
2003......... 522,941,279 21,736,777 24.06 .38 .81
2004......... 618,887,401 21,979,676 28.16 .44 .88
June 30, 2005 705,224,979 21,642,506 32.59 .31+ .08+
--------
* Prior years have been adjusted to reflect the 3-for-2 stock split effected in
October 2000.
+ Paid or declared.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Petroleum & Resources Corporation:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Petroleum & Resources Corporation
(hereafter referred to as the "Corporation") at June 30, 2005, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the fiscal periods presented, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at June 30, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 13, 2005
15
OTHER INFORMATION
--------------------------------------------------------------------------------
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 Corporation 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 Corporation's Forms N-Q are available on the Commission's website at
www.sec.gov. The Corporation'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
Corporation also posts its Forms N-Q on its website at: www.peteres.com under
the heading "Financial Reports".
PROXY VOTING POLICIES AND RECORD
A description of the policies and procedures that the Corporation uses to
determine how to vote proxies relating to portfolio securities owned by the
Corporation and information as to how the Corporation voted proxies relating to
portfolio securities during the 12 month period ended June 30, 2005 are
available (i) without charge, upon request, by calling the Corporation's toll
free number at (800) 638-2479; (ii) on the Corporation's website by clicking on
"Corporate Information" heading on the website; and (iii) on the Securities and
Exchange Commission's website at http//www.sec.gov.
PRIVACY POLICY
In order to conduct its business, Petroleum & Resources Corporation collects
and maintains certain nonpublic personal information about our stockholders of
record with respect to their transactions in shares of our securities. This
information includes the stockholder's address, tax identification or Social
Security number, share balances, and dividend elections. We do not collect or
maintain personal information about stockholders 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
stockholders or our former stockholders 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 stockholders to those employees who
need to know that information to provide services to our stockholders. We also
maintain certain other safeguards to protect your nonpublic personal
information.
-----------------
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 Registered Public Accounting Firm: PricewaterhouseCoopers LLP
Transfer Agent & Registrar: American Stock Transfer & Trust Co.
Custodian of Securities: Brown Brothers Harriman & Co.
16
ANNUAL MEETING OF STOCKHOLDERS
--------------------------------------------------------------------------------
The Annual Meeting of Stockholders was held on April 27, 2005. For those
nominated, the following votes were cast for directors:
votes for votes withheld
---------- --------------
(A) Enrique R. Arzac: 19,479,876 433,177
(B) Phyllis O. Bonanno: 19,467,618 445,435
(C) Daniel E. Emerson: 19,394,949 518,104
(D) Thomas H. Lenagh: 19,364,541 548,512
(E) W.D. MacCallan: 19,437,106 475,947
(F) Kathleen T. McGahran: 19,474,596 438,457
(G) Douglas G. Ober: 19,504,516 408,537
(H) John J. Roberts: 19,358,564 554,489
(I) Susan C. Schwab: 19,463,763 449,290
(J) Robert J.M. Wilson: 19,381,966 531,087
A proposal to approve and ratify the selection of PricewaterhouseCoopers LLP as
the independent registered public accounting firm for the Corporation for 2005
was approved with 19,524,683 votes for, 228,511 votes against, and 159,859
shares abstaining.
A proposal to approve the adoption of the Petroleum & Resources Corporation
2005 Equity Incentive Compensation Plan was approved with 9,537,628 votes for,
1,691,906 votes against, 552,864 shares abstaining, and 8,130,655 shares
unvoted.
17
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.
INVESTORS CHOICE
INVESTORS CHOICE is a direct stock purchase and sale plan, as well as a
dividend reinvestment plan, sponsored and administered by our transfer agent,
American Stock Transfer & Trust Company (AST). 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 and
Optional Cash Investments
Service Fee $2.50 per investment
Brokerage Commission $0.05 per share
Reinvestment of Dividends**
Service Fee 2% 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 $7.50
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 INVESTORS CHOICE
as well as an enrollment form may be obtained by contacting AST.
For Non-Registered Shareholders
For shareholders whose stock is held by a broker in "street" name, the AST
INVESTORS CHOICE Direct Stock Purchase and Sale 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 AST's Plan or contact AST.
----------
The Corporation
Petroleum & Resources Corporation
Lawrence L. Hooper, Jr.
Vice President, General Counsel and Secretary
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
The Transfer Agent
American Stock Transfer & Trust Company
Address Shareholder Inquiries to:
Shareholder Relations Department
59 Maiden Lane
New York, NY 10038
(866) 723-8330
Website: www.amstock.com
E-mail: info@amstock.com
Investors Choice Mailing Address:
Attention: Dividend Reinvestment
P.O. Box 922
Wall Street Station
New York, NY 10269
Website: www.InvestPower.com
E-mail: info@InvestPower.com
*The year-end dividend and capital gain distribution will usually be made in
newly issued shares of common stock. There are no fees or commissions in
connection with this dividend and capital gain distribution when made in newly
issued shares.
18
Item 2: Code(s) of Ethics for senior financial officers -
Item not applicable to semi-annual report.
Item 3: Audit Committee Financial Expert - Item not
applicable to semi-annual report.
Item 4: Principal Accountant Fees and Services - Item not
applicable to semi-annual report.
Item 5: Audit Committee of Listed Registrants - Item not
applicable to semi-annual report.
Item 6: Schedule of Investments - This schedule is included
as part of the report to shareholders filed under Item 1 of
this form.
Item 7: Disclosure of Proxy Voting Policies and Procedures
for Closed-End Management Investment Companies - Item not
applicable to semi-annual report.
Item 8: Portfolio Managers of Closed-End Management
Investment Companies - Item not applicable to semi-annual
report.
Item 9: Purchases of Equity Securities by Closed-End
Management Investment Company and Affiliated Purchasers.
Maximum
Total Number (or
Number of Approximate
Shares (or Dollar Value)
Total Units) of Shares (or
Number Purchased Units) that
of Average as Part of May Yet Be
Shares Price Publicly Purchased
(or Paid per Announced Under the
Units) Share (or Plans or Plans or
Period(2) Purchased Unit) Programs Programs
-------- --------- --------- --------- ---------
Jan. 2005 13,500 $ 25.72 13,500 1,051,846
Feb. 2005 30,250 $ 28.92 30,250 1,021,596
Mar. 2005 112,650 $ 29.16 112,650 908,946
Apr. 2005 7,300 $ 29.92 7,300 901,646
May 2005 74,500 $ 27.20 74,500 827,146
June 2005 107,200 $ 29.58 107,200 719,946
-------- --------- --------- --------- ---------
Total 345,400(1) $ 28.73 345,400(2) 719,946(2)
(1) There were no shares purchased other than through a
publicly announced plan or program.
(2.a) The Plan was announced on December 9, 2004.
(2.b) The share amount approved was 5% of outstanding
shares, or approximately 1,080,746 shares.
(2.c) The Plan will expire on or about December 8, 2005.
(2.d) None.
(2.e) None.
Item 10: Submission of Matters to a Vote of Security Holders
- There were no material changes to the procedures by which
shareholders may recommend nominees to the registrant's
board of directors made or implemented after the registrant
last provided disclosure in response to the requirements of
Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or
this Item.
Item 11: Controls and Procedures.
(a) The registrant's Principal Executive Officer and
Principal Financial Officer have evaluated the registrant's
disclosure controls and procedures within 90 days of this
filing and have concluded that the registrant's disclosure
controls and procedures were effective, as of that date, in
ensuring that information required to be disclosed by the
registrant in this Form N-CSR was recorded, processed,
summarized, and reported timely.
(b) Internal Controls. Effective April 25, 2005, the
Corporation changed custodian from The Bank of New York to
Brown Brothers Harriman & Co. There were no significant
changes in the registrant's internal controls or in other
factors that could significantly affect these controls
subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Item 12: Exhibits attached hereto. (Attach certifications
as exhibits)
(1) Not required at this time.
(2) Separate certifications by the registrant's principal
executive officer and principal financial officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 and
required by Rule 30a-2 under the Investment Company Act of
1940, are attached.
A certification by the registrant's principal executive
officer and principal financial officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, is attached.
Pursuant to the requirements of the Securities Exchange Act
of 1934 and the Investment Company Act of 1940, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PETROLEUM & RESOURCES CORPORATION
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer
(Principal Executive Officer)
Date: July 28, 2005
Pursuant to the requirements of the Securities Exchange Act
of 1934 and the Investment Company Act of 1940, this report
has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer
(Principal Executive Officer)
Date: July 28, 2005
BY: /s/ Maureen A. Jones
-----------------------
Maureen A. Jones
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: July 28, 2005