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
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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, 2006
Date of reporting period: December 31, 2006
Item 1. Reports to Stockholders.
[GRAPHIC]
INVESTING IN RESOURCES FOR THE FUTURE
Petroleum
& Resources
Corporation
Annual Report 2006
2006 AT A GLANCE
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THE CORPORATION
.. a closed-end equity investment company emphasizing natural resources stocks
.. objectives: preservation of capital
reasonable income
opportunity for capital gain
.. internally-managed
.. low expense ratio
.. low turnover
STOCK DATA (12/31/06)
NYSE Symbol.............. PEO
Market Price ......... $33.46
52-Week Range $30.02 - $36.81
Discount ............... 8.6%
Shares Outstanding 22,180,867
SUMMARY FINANCIAL INFORMATION
Year Ended December 31
2006 2005
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Net asset value per share $ 36.61 $ 35.24
Total net assets 812,047,239 761,913,652
Unrealized appreciation 462,398,019 428,811,345
Net investment income 9,844,108 11,391,783
Total realized gain 69,700,053 26,239,852
Total return (based on market value) 15.3% 32.3%
Total return (based on net asset value) 15.7% 32.0%
Expense ratio 0.60% 0.59%
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2006 DIVIDENDS AND DISTRIBUTIONS
Amount
Paid (per share) Type
-----------------------------------------------------
March 1, 2006 $0.07 Long-term capital gain
March 1, 2006 0.03 Short-term capital gain
March 1, 2006 0.03 Investment income
June 1, 2006 0.13 Investment income
September 1, 2006 0.13 Investment income
December 27, 2006 2.92 Long-term capital gain
December 27, 2006 0.31 Short-term capital gain
December 27, 2006 0.18 Investment income
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$3.80
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2007 ANNUAL MEETING OF STOCKHOLDERS
Location: The Maryland Club, Baltimore, Maryland
Date: March 27, 2007
Time: 11:00 a.m.
PORTFOLIO REVIEW
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TEN LARGEST PORTFOLIO HOLDINGS (12/31/06)
Market Value % of Net Assets
-----------------------------------------------------------
Exxon Mobil Corp. $ 95,404,350 11.8
Chevron Corp. 46,691,550 5.8
ConocoPhillips 40,068,307 4.9
Schlumberger Ltd. 35,369,600 4.4
Devon Energy Corp. 22,807,200 2.8
Valero Energy Corp. 22,254,600 2.7
BP plc ADR 22,143,000 2.7
BJ Services Co. 21,696,800 2.7
Noble Energy, Inc. 21,100,100 2.6
Weatherford International Ltd. 20,625,872 2.5
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Total $348,161,379 42.9%
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SECTOR WEIGHTINGS (12/31/06)
[CHART]
Integrated 39.5%
Exploration & Production 14.8%
Utilities 13.7%
Services 21.5%
Basic Materials & Other 7.3%
Cash & Equivalent 3.5%
1
PETROLEUM & RESOURCES CORPORATION
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Calendar Market Cumulative Cumulative Total Total net
Years value market value market value market asset
of of capital of income value value
original gains dividends
shares distributions taken in
taken in shares
shares
--------------------------------------------------------------
1992 $ 9,677 $ 486 $ 271 $10,434 $11,433
1993 10,540 1,080 625 12,245 13,200
1994 9,677 1,518 939 12,134 12,901
1995 10,827 2,303 1,482 14,612 16,301
1996 13,323 3,554 2,284 19,161 20,449
1997 13,990 4,572 2,824 21,386 24,296
1998 11,742 4,742 2,793 19,277 21,586
1999 12,363 6,085 3,375 21,823 26,715
2000 15,703 9,269 4,713 29,685 35,534
2001 13,490 9,165 4,466 27,121 28,784
2002 11,029 8,264 4,107 23,400 25,596
2003 13,651 11,343 5,607 30,601 31,013
2004 14,824 13,452 6,708 34,984 38,213
2005 18,596 18,506 9,177 46,279 50,428
2006 19,240 23,961 10,135 53,336 58,356
ILLUSTRATION OF AN ASSUMED 15 YEAR INVESTMENT OF $10,000
(unaudited)
Investment income dividends and capital gains distributions are taken in
additional shares. This chart covers the years 1992-2006. Fees for the
reinvestment of interim dividends are assumed as 2% of the amount reinvested
(maximum of $2.50) and commissions of $0.05 per share. There is no charge for
reinvestment of year-end distributions. No adjustment has been made for any
income taxes payable by stockholders on income dividends or on capital gains
distributions or the sale of any shares. These results should not be considered
representative of the dividend income or capital gain or loss which may be
realized in the future.
2
LETTER TO SHAREHOLDERS
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2006 saw the fifth consecutive year of the cyclical upturn of oil and natural
gas prices and strong share price performance in the energy sector. While the
performance of commodity prices and energy equities in general has been
outstanding during the period, disparities began to show up during the year, as
might be expected in the latter part of a cycle. The total return on net assets
of Petroleum & Resources Corporation in 2006, after reinvestment of dividends
and capital gain distributions, was 15.7% and the return on market value was
15.3%. The Dow Jones Oil & Gas Index (DJOGI) rose 21% during the year, while
the broader S&P 500 Index returned 15.8%. The Fund's diversification within the
energy industry and its non-energy investments are the main reasons its
performance lagged that of the DJOGI while approximating the S&P 500. In this
annual report, we will summarize market events and our performance for the
year. We will also discuss how we see energy markets unfolding in 2007 and
factors which may affect them.
A REVIEW OF 2006
What seemed to be a likely crisis for petroleum markets in the aftermath of
Hurricanes Katrina and Rita did not materialize in 2006 as generally mild
temperatures helped to
keep oil prices from reaching even higher levels during the 2005-2006 heating
season. The reduced demand domestically served to calm the markets early in the
year. Though a great deal transpired in the intervening months, the end of 2006
was marked by mild temperatures again, resulting in the spot price of West
Texas Intermediate crude oil (WTI) closing the year at $61.05, just 1 cent
higher than it began the year.
During the year, commodity prices were marked by great volatility, with WTI
ranging from a high of $77 in July to a low of $56 in November. Strong
worldwide demand coupled with actual or perceived capacity shortages and
geopolitical unrest pushed prices higher in the first half of the year. Renewed
attacks in Iraq, Iran's nuclear ambitions, terrorist attacks in Nigeria, and
the brief war between Israel and Hezbollah in Lebanon all served to heighten
anxiety among oil traders. Expectations of another damaging hurricane season
and the slow recovery of operations subsequent to the 2005 hurricane season led
market participants to buy additional contracts early in the year, pushing the
price up. As the hurricane season wound down and little damage was incurred,
traders liquidated their positions and a massive sell-off took place,
concluding in November.
In fact, the growth in worldwide demand for oil declined modestly in 2006, from
the 1.5% rate of the past to a 1.1% rate as higher prices began to affect the
world's economies. China still accounted for 41% of the increase, followed by
India at 6%, according to the International Energy Agency. Worldwide production
grew by roughly 1.2%, resulting in the tight supply/demand balance in existence
much of the year. OPEC maintained its production quota of 28 million barrels
per day (excluding Iraq). Toward the end of the year, demand began to reflect
the higher prices and inventories started building around the world. OPEC
responded by announcing the first production cut, of 1.2 million barrels per
day, since April 2004. With prices drifting to the low end of its desired
range, OPEC announced another, smaller cut in production to take effect in
February 2007. Further strengthening its influence on oil prices was the
announcement that Angola, a 2 million barrel per day producer, would join OPEC
in January of 2007.
The domestic market for gasoline was also quite volatile during the year as
refining bottlenecks were experienced and supplies fell short at critical
times. The aftereffects of the hurricanes of 2005 were partly responsible as
refinery restarts were slow in coming and functioning refineries had to be
taken down for maintenance after operating at high utilization levels for
extended periods. In addition, MTBE was effectively banned as an additive,
resulting in the need to reformulate some products. Downstream (product)
margins were strong the first half of the year as a result. During the summer
driving season, with robust demand, the average retail price of regular
gasoline exceeded $3 per gallon for four consecutive weeks.
The high oil prices realized during 2006 funded heavy exploration for
conventional oil and also provided an opportunity for non-conventional
hydrocarbons to come into the market. The demand for oil rigs, equipment, and
services drove up prices for those items considerably; oil service stocks rose
as well. The higher prices of services and equipment were also reflected in the
cost to find and produce new reserves. Development of oil sands, mostly in
Canada, continued at high levels and biofuels attracted interest, driven by
both federal mandates and profitability. In the U. S., corn-based ethanol
refineries sprang up throughout the Midwest and built market share in the
gasoline
[PHOTO]
Douglas G. Ober,
Chairman, President and Chief
Executive Officer
3
LETTER TO SHAREHOLDERS (continued)
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sector. Thus far, all of the non-conventional fuels are more costly to produce
than oil and gas and rely on subsidies, but they have helped sustain the higher
price of the traditional fuels.
The volatility of natural gas prices in 2006 was even greater than that of oil,
largely due to the extremes of weather experienced. These are generally
temporary in nature, but highly unpredictable, as evidenced by the hurricanes
in 2005 and the lack thereof in 2006. There has also been a fundamental change
in the demand for natural gas, in the form of demand destruction due to
efficiencies and industrial demand lost to lower-cost producers. Low gas usage
in the warm winter of 2005-2006 was partially offset by power generation needs
during the hot summer months. The lack of supply interruptions and record
natural gas drilling and well completions resulted in a high level of supply.
Strong cash flows and good drilling opportunities enabled producing companies
to maintain active drilling programs. The result has been a significant
increase in the level of domestic natural gas storage and depressed natural gas
prices. Prices for the front month contract started the year at $11.225 per
million BTU, the peak for the year, and closed the year at $6.299 per million
BTU. At the same time, production and reserve growth objectives forced
exploration and production (E&P) companies to compete for equipment and
services. Costs rose, commodity prices declined, and margins were squeezed.
Prices for our other principal source of energy, coal, were also volatile
during 2006. After several years of strong price increases and rising
utilization rates at coal-fired power plants, the coal industry responded with
higher levels of production early in 2006. A mild end to the winter and ample
supplies of natural gas resulted in a build-up in inventories through the year
and weaker prices toward the end of the year.
ENERGY SECTOR PERFORMANCE
Energy stocks performed very well during most of 2006, as the price of oil rose
steadily through July and remained in the $60-$65 range for the bulk of the
rest of the year. By the end of November, the Dow Jones Oil & Gas Index (DJOGI)
had risen 23.8%. It was only in the final weeks of 2006 that commodity prices
dropped precipitously and the energy stocks followed them down. For the year as
a whole, the DJOGI rose 21%. The DJOGI is weighted by market capitalization,
resulting in great emphasis on large, integrated energy companies such as Exxon
Mobil, Chevron, and ConocoPhillips. Those three companies comprise over 50% of
the DJOGI. With high oil prices, strong margins in refining and marketing, and
capital discipline, the major integrated companies generated large amounts of
cash in the first half of 2006 and used it for exploration, expanded
production, dividend increases, and large share repurchases. As the year
progressed, industry dynamics changed, especially for companies focused on
natural gas. Drilling and well completion success combined with the absence of
major hurricanes resulted in a build-up of inventory, which in turn dimmed the
prospects of smaller exploration and production companies. The stocks of many
of these companies fell by more than 10% in the final weeks of the year. The
"majors," with their more diversified operations, held up considerably better,
with returns of 21% (ConocoPhillips) to 35% (Exxon Mobil). While the Fund has
large positions in the "majors" (23.2% in the three mentioned above), its
diversification, which is done primarily to reduce risk and is normally
beneficial for the Fund's performance, worked against it. In addition, holdings
in chemicals, materials, and utilities did not perform as well as the large
energy companies.
INVESTMENT RESULTS
Net assets of the Corporation on December 31, 2006 were $812,047,239 or $36.61
per share on 22,180,867 shares outstanding. This compares with $761,913,652 or
$35.24 per share on 21,621,072 shares outstanding a year earlier.
Net investment income for 2006 was $9,844,108 compared to $11,391,783 for 2005.
These earnings are equivalent to $0.47 and $0.53 per share, respectively, on
the average number of shares outstanding throughout each year. Our 0.60%
expense ratio (expenses to average net assets) was once again at a low level
compared to the industry.
Net realized gains amounted to $69,700,053 during the year, while the
unrealized appreciation on investments increased from $428,811,345 at December
31, 2005 to $462,398,019 at year end.
DIVIDENDS AND DISTRIBUTIONS
Total dividends and distributions paid in 2006 were $3.80 per share compared to
$1.78 in 2005. The table on page 22 shows the history of our dividends and
distributions over the past fifteen years, including the annual rate of
distribution as a percentage of the average daily market price of the
Corporation's Common Stock. In 2006, the annual rate of distribution was 11.26%
compared to 5.90% in 2005. As announced on November 9, 2006, a year-end
distribution consisting of investment income of $0.18 and capital gains of
$3.23 was made on December 27, 2006, both realized and taxable in 2006. On
January 11, 2007, an additional distribution of $0.13 per share was declared to
shareholders of record February 15, 2007, payable March 1, 2007, representing
undistributed net investment income and capital gains earned in 2006, taxable
to shareholders in 2007.
4
LETTER TO SHAREHOLDERS (continued)
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OUTLOOK FOR 2007
The price of oil has fallen 14% in the first several weeks of 2007 in response
to the growing inventories of crude and refined products. OPEC has cut
production once and has announced a second, albeit smaller, cut to take effect
in February. These actions have had no impact on the price of the commodity.
Demand for gasoline and other refined products is not growing at its historic
rate as world economies are experiencing slower growth. Worldwide supply and
demand are not likely to come back into balance in the near future without more
production cuts by OPEC members. The increased levels of exploration activity
in recent years will result in higher non-OPEC production in 2007 and 2008.
Still, there is very little excess productive capacity in the world today and
that is why prices remain relatively high. Any significant disruption in the
oil fields, due to natural forces, terrorism, or other geopolitical activity,
would drive prices back up to their recent highs and perhaps beyond in short
order. It is for this reason that prices are not considerably lower today.
Our view of the world economy in 2007 is that it is likely to experience slower
growth, on the order of 3.5%, down from about 4% in 2006. The U. S. economy,
the largest user of oil, is expected to grow only 2-2 1/2% this year as the
effects of higher commodity prices (including energy, industrial, and
agricultural) and short-term interest rates are felt. While an inverted yield
curve (higher short-term than long-term rates), such as that experienced in the
last 18 months, has historically presaged recession in this country, we do not
expect that to occur. Corporate balance sheets are generally in good condition,
with many companies carrying large amounts of cash. The weakness in the housing
and auto industries does not appear to be spilling over into the rest of the
economy. Of course, further rate hikes by the Federal Reserve to fight
perceived inflation risks could drive the economy into recession, as could
spikes in commodity prices. Barring these, we are comfortable that the economy
will continue to grow, although at a reduced pace from 2006 and previously.
Many of the other economies of the world are in similar situations to the U.S.
Central banks have raised rates to slow growth and all economies are being hit
by higher commodity prices.
Given this economic outlook, we expect that the price of oil will gradually
decline as non-OPEC oil production picks up, a worldwide emphasis on
alternative fuels begins to have an effect on demand, and OPEC is shown to have
only partial success in controlling supply. Most industry participants have
benefited greatly from the increasing prices of the past several years, but the
opportunities to put the cash generated to work in the oilfields have been
limited. A number of countries have moved to take control of their energy
resources (Russia, Venezuela, Bolivia), while others have tried to lock up
foreign supplies through their national oil companies (China, India). This has
further limited the opportunities available to the industry. Therefore, we are
not looking for oil stocks to outperform the rest of the equity market again in
2007. Earnings comparisons are likely to be unfavorable as the cycle passes its
peak. Valuations, on the other hand, may be driven up as a result of continued
consolidation activity. With large amounts of cash on hand, companies may be
tempted to purchase reserves rather than drill for them. We do expect continued
heavy exploration activity, though, to bring new oil reserves on stream several
years from now. This will benefit the offshore drilling and oil service
companies, whose stocks should perform relatively well.
The natural gas market is also likely to be a difficult one in 2007 unless the
large inventories are worked off in an extended period of cold weather. Without
such a weather change, prices are expected to decline through the spring and
into the summer cooling season. Any firming of prices is unlikely to occur
before the second half of the year. This would be precipitated by lower
production as drilling activity slows in response to the lower prices of the
spring and summer. Companies predominantly involved in natural gas production
are not expected to perform well in the short term, nor are drilling and
service companies in that sector.
While our outlook for 2007 at this point is rather pessimistic, the longer term
outlook remains solid. Worldwide supplies of oil and natural gas are not
growing much and the substitution of alternatives is minimal to date. The
economic slowdown discussed above will temporarily slow the growth in demand,
but we expect economic growth to pick up in 2008 and beyond, stimulating the
demand for energy.
In anticipation of the short-term weakness, we have sold or reduced positions
in a number of gas-oriented companies and increased our holdings of integrated
producers. These companies are in the best position to act as consolidators in
the industry and gain market share, which will benefit them when the cycle
turns up again.
SPECIAL SHAREHOLDER MEETING
We were gratified with the strong support shown by our shareholders at the
special meeting held on November 7, 2006. All eight of the proposals of the
Board of Directors were overwhelmingly approved, with no proposal
5
LETTER TO SHAREHOLDERS (continued)
--------------------------------------------------------------------------------
receiving less than 83% of the votes cast. A full report of the meeting can be
found on page 24. The approval of these important changes to the corporate
charter provides the Corporation with additional tools to protect the interests
of our long-term shareholders. You have clearly expressed your interest in
seeing the Corporation continue as a closed-end fund, and your action has
strengthened our ability to do so.
SHARE REPURCHASE PROGRAM
On December 14, 2006, the Board of Directors authorized the repurchase by
management of an additional 5% of the outstanding shares of the Corporation
over the ensuing year. The repurchase program is subject to the restriction
that shares can only be repurchased when the discount of the market price of
the shares from the net asset value is 6.5% or greater.
From the beginning of 2007 through January 25, 2007, 51,425 shares have been
repurchased at a total cost of $1,627,011 and a weighted average discount from
net asset value of 9.2%.
The proxy statement for the Annual Meeting of Stockholders to be held in
Baltimore on March 27, 2007, is expected to be mailed on or about February 16,
2007.
By order of the Board of Directors,
/s/ Douglas G. Ober
Douglas G. Ober,
Chairman, President and
Chief Executive Officer
January 26, 2007
6
STATEMENT OF ASSETS AND LIABILITIES
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December 31, 2006
Assets
Investments* at value:
Common stocks and convertible securities
(cost $323,839,225) $786,044,585
Short-term investments (cost $28,392,769) 28,392,769
Securities lending collateral (cost $43,181,867) 43,181,867 $857,619,221
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Cash 357,320
Receivables:
Investment securities sold 7,013
Dividends 716,669
Prepaid expenses and other assets 538,066
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Total Assets 859,238,289
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Liabilities
Open written option contracts at value (proceeds $328,534) 135,875
Obligations to return securities lending collateral 43,181,867
Accrued pension liabilities 1,617,595
Accrued expenses and other liabilities 2,255,713
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Total Liabilities 47,191,050
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Net Assets $812,047,239
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Net Assets
Common Stock at par value $0.001 per share, authorized
50,000,000 shares; issued and outstanding 22,180,867 shares (includes
16,109 restricted shares, 4,000 restricted stock units and 1,289 deferred
stock units) (Note 6) $ 22,181
Additional capital surplus 349,473,874
Accumulated other comprehensive income (Note 5) (1,966,975)
Undistributed net realized gain on investments 2,120,140
Unrealized appreciation on investments 462,398,019
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Net Assets Applicable to Common Stock $812,047,239
------------------------------------------------------------------------------------------------------
Net Asset Value Per Share of Common Stock $36.61
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* See schedule of investments on pages 16 through 18.
The accompanying notes are an integral part of the financial statements.
7
Investment Income
Income:
Dividends $ 12,904,753
Interest and other income 1,773,465
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Total income 14,678,218
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Expenses:
Investment research 1,921,295
Administration and operations 1,148,880
Directors' fees 390,861
Reports and stockholder communications 559,595
Transfer agent, registrar and custodian expenses 149,016
Auditing and accounting services 94,231
Legal services 120,041
Occupancy and other office expenses 228,719
Travel, telephone and postage 90,432
Other 131,040
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Total expenses 4,834,110
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Net Investment Income 9,844,108
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Realized Gain and Change in Unrealized Appreciation on Investments
Net realized gain on security transactions 69,700,053
Change in unrealized appreciation on investments 33,586,674
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Net Gain on Investments 103,286,727
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Change in Net Assets Resulting from Operations $113,130,835
-------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
8
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
For the Year Ended
--------------------------
Dec. 31, 2006 Dec. 31, 2005
------------------------------------------------------------------------------------------
From Operations:
Net investment income $ 9,844,108 $ 11,391,783
Net realized gain on investments 69,700,053 26,239,852
Change in unrealized appreciation on investments 33,586,674 153,388,454
Adjustment to apply FASB Statement No. 158 (note 5) (1,966,975) --
------------------------------------------------------------------------------------------
Change in net assets resulting from operations 111,163,860 191,020,089
------------------------------------------------------------------------------------------
Distributions to Stockholders From:
Net investment income (9,928,393) (12,030,248)
Net realized gain from investment transactions (69,654,826) (25,924,473)
------------------------------------------------------------------------------------------
Decrease in net assets from distributions (79,583,219) (37,954,721)
------------------------------------------------------------------------------------------
From Capital Share Transactions:
Value of shares issued in payment of distributions 46,212,047 14,748,314
Cost of shares purchased (note 4) (28,033,719) (24,891,727)
Deferred compensation (notes 4, 6) 374,618 104,296
------------------------------------------------------------------------------------------
Change in net assets from capital share transactions 18,552,946 (10,039,117)
------------------------------------------------------------------------------------------
Total Increase in Net Assets 50,133,587 143,026,251
Net Assets:
Beginning of year 761,913,652 618,887,401
------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $0 and $106,632, respectively) $812,047,239 $761,913,652
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
9
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 is an internally-managed fund emphasizing petroleum and other
natural resource investments. The investment objectives of the Corporation are
preservation of capital, the attainment of reasonable income from investments,
and an opportunity for capital appreciation.
Security Valuation -- Investments in securities traded on national securities
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 December 31, 2006 was $395,384,038, and net unrealized
appreciation aggregated $462,235,183, of which the related gross unrealized
appreciation and depreciation were $466,819,816 and $4,584,633, respectively.
As of December 31, 2006, the tax basis of distributable earnings was $1,378,831
of undistributed ordinary income and $1,527,213 of undistributed long-term
capital gain.
Distributions paid by the Corporation during the year ended December 31, 2006
were classified as ordinary income of $17,053,276 and capital gain of
$62,529,943. In comparison, distributions paid by the Corporation during the
year ended December 31, 2005 were classified as ordinary income of $15,437,432
and capital gain of $22,517,289. The distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. Accordingly, periodic 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 year ended December 31, 2006 were $77,623,403 and
$122,309,761, 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 December 31,
2006 can be found on page 19.
Transactions in written covered call and collateralized put options during the
year ended December 31, 2006 were as follows:
Covered Calls Collateralized Puts
-------------------- -------------------
Contracts Premiums Contracts Premiums
--------- ---------- --------- ---------
Options outstanding,
December 31, 2005 1,940 $ 292,777 1,050 $ 129,891
Options written 6,924 1,123,802 6,870 816,798
Options terminated in
closing purchase
transactions (1,250) (382,428) (1,440) (177,306)
Options expired (5,091) (571,739) (4,980) (585,936)
Options exercised (1,398) (219,828) (750) (97,497)
----------------------------------------------------------------
Options outstanding,
December 31, 2006 1,125 $ 242,584 750 $ 85,950
----------------------------------------------------------------
4. CAPITAL STOCK
The Corporation has 5,000,000 authorized and unissued preferred shares, $0.001
par value.
On December 27, 2005, the Corporation issued 438,416 shares of its Common Stock
at a price of $33.64 per share (the average market price on December 12, 2005)
to stockholders of record November 22, 2005 who elected to take stock in
payment of the distribution from 2005 capital gain and investment income.
On December 27, 2006, the Corporation issued 1,369,675 shares of its Common
Stock at a price of $33.73 per share (the average market price on December 11,
2006) to stockholders of record November 21, 2006 who elected to take stock in
payment of the distribution from 2006 capital gain and investment income. In
addition, 376 shares were issued at a weighted average price of $33.76 per
share as dividend equivalents to holders of deferred stock units and restricted
stock units under the 2005 Equity Incentive Compensation Plan.
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.
10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Transactions in Common Stock for 2006 and 2005 were as follows:
Shares Amount
------------------- --------------------------
2006 2005 2006 2005
--------- -------- ------------ ------------
Shares issued in payment
of distributions 1,370,051 438,416 $ 46,212,047 $ 14,748,314
Shares purchased
(at an average discount
from net asset value of
10.1% and 8.0%,
respectively) (827,959) (806,050) (28,033,719) (24,891,727)
Net activity under the 2005
Equity Incentive
Compensation Plan 17,703 9,030 374,618 104,296
----------------------------------------------------------------------------
Net change 559,795 (358,604) $ 18,552,946 $(10,039,117)
----------------------------------------------------------------------------
5. RETIREMENT PLANS
The Corporation applied the provisions of Financial Accounting Standards Board
("FASB") Statement No. 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, at December 31, 2006. This accounting standard
requires recognition of the overfunded or underfunded status of a defined
benefit plan in the Statement of Assets and Liabilities, and recognition of
changes in the funded status in the years in which the changes occur through
the capital accounts. The transition rules for implementing the standard
require applying the provisions as of the end of the year of initial
implementation with no retrospective application. The incremental effects on
the line items in the Statement of Assets and Liabilities at December 31, 2006,
are as follows:
Before After
Application of Application of
Statement 158 Adjustments Statement 158
-------------- ----------- --------------
Prepaid pension cost $ 1,000,083 $(1,000,083) $ --
-------------------------------------------------------------------
Total Assets $860,238,372 $(1,000,083) $859,238,289
-------------------------------------------------------------------
Accrued pension
liabilities $ 650,703 $ 966,892 $ 1,617,595
-------------------------------------------------------------------
Total Liabilities $ 46,224,158 $ 966,892 $ 47,191,050
-------------------------------------------------------------------
Accumulated other
comprehensive income $ -- $(1,966,975) $ (1,966,975)
-------------------------------------------------------------------
Net Assets Applicable to
Common Stock $814,014,214 $(1,966,975) $812,047,239
-------------------------------------------------------------------
The Corporation provides retirement benefits for its employees under a
non-contributory qualified defined benefit pension plan and a non-contributory
nonqualified defined benefit pension plan. The benefits are based on years of
service and compensation during the last five years of employment.
The Corporation uses a December 31 measurement date for its plans.
2006 2005
----------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 4,947,252 $4,519,368
Service cost 334,876 185,168
Interest cost 327,991 281,088
Actuarial loss 745,184 66,553
Benefits paid (64,461) (104,925)
-----------------------------------------------------------------------
Benefit obligation at end of year $ 6,290,842 $4,947,252
-----------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 3,963,078 $3,505,688
Actual return on plan assets 343,422 106,795
Employer contribution 431,208 455,520
Benefits paid (64,461) (104,925)
-----------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,673,247 $3,963,078
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Funded status $(1,617,595) $ (984,174)
-----------------------------------------------------------------------
Unrecognized prior service cost $ -- $ 152,389
Unrecognized net loss -- 1,361,416
-----------------------------------------------------------------------
Net amount recognized $ -- $ 529,631
-----------------------------------------------------------------------
Items not yet recognized as a component of net peri-
odic pension cost:
2006 2005
----------- ----------
Prior service cost $ 114,672 $ --
Net (gain)/loss 1,852,303 --
-----------------------------------------------------------------------
Total recognized as a charge to net assets $ 1,966,975 $ --
-----------------------------------------------------------------------
The accumulated benefit obligation for all defined benefit pension plans was
$4,722,250 and $3,491,069 at December 31, 2006 and 2005, respectively.
2006 2005
--------- ---------
Components of net periodic pension cost
Service cost $ 334,876 $ 185,168
Interest cost 327,991 281,088
Actual return on plan assets (343,422) (106,795)
Amortization of prior service cost 37,717 54,913
Amortization of net loss 225,362 180,246
Deferred asset gain 31,224 (173,395)
-------------------------------------------------------------
Net periodic pension cost $ 613,748 $ 421,225
-------------------------------------------------------------
In 2007, the Corporation estimates that $213,000 of prior service cost and
$37,000 of net losses, for a total of $250,000, will be amortized from
accumulated other comprehensive income into net periodic pension cost.
Assumptions used to determine benefit obligations and costs are:
2006 2005
----- -----
Discount rate 5.75% 5.75%
Expected long-term return on plan assets 8.00% 8.00%
Rate of compensation increase 7.00% 7.00%
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The assumption for the expected long-term return on plan assets is based on the
actual long-term historical returns realized by the plan assets, weighted
according to the current asset mix.
The asset allocations at December 31, 2006 and 2005, by asset category, are as
follows:
2006 2005
---- ----
Asset Category
Equity Securities & Equity Mutual Funds 66% 70%
Fixed Income Mutual Funds 28% 29%
Cash 6% 1%
Equity securities include common stock of The Adams Express Company, the
Corporation's non-controlled affiliate, in the amount of $236,906 (5% of total
plan assets) and $203,280 (5% of total plan assets) at December 31, 2006 and
2005, respectively.
The primary objective of the Corporation's pension plan is to provide capital
appreciation, current income, and preservation of capital through a portfolio
of stocks and fixed income securities. The equity portion of the portfolio may
range from 50% to 75% of total portfolio assets. The fixed income portion of
the portfolio may range from 25% to 50% of total portfolio assets and cash may
range from 0% to 25% of total portfolio assets. Subject to these allocation
ranges, the portfolio may be invested in any of the following securities:
common stocks, preferred stocks, American Depository Receipts, foreign
securities, mutual funds, convertible securities, municipal bonds, corporate
bonds, U.S. government securities and U.S. government agency securities.
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. The Corporation anticipates
making contributions of approximately $430,000 to the plans in 2007.
The following benefit payments, which reflect expected future service, are
expected to be paid:
Pension Benefits
----------------
2007 $ 150,813
2008 314,533
2009 312,503
2010 356,651
2011 350,819
Years 2012-2016 1,896,243
The Corporation also sponsors a defined contribution plan that covers
substantially all employees. The Corporation expensed contributions to this
plan of $97,787 and $85,570 for the years ended December 31, 2006 and December
31, 2005, respectively. The Corporation does not provide postretirement medical
benefits.
6. EQUITY-BASED COMPENSATION
The Stock Option Plan adopted in 1985 ("1985 Plan") has been discontinued and
no further grants will be made under this Plan although unexercised awards
granted in 2004 and prior years remain outstanding. The 1985 Plan permitted the
issuance of stock options and stock appreciation rights for the purchase of up
to 895,522 shares of the Corporation'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 or shares 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.
A summary of option activity under the 1985 Plan as of December 31, 2006, and
changes during the period then ended is presented below:
Weighted- Weighted-
Average Average
Exercise Remaining
Options Price Life (Years)
------- --------- ------------
Outstanding at December 31, 2005 103,997 $18.24 5.07
Exercised (15,609) 12.62
Cancelled (4,474) 20.34
----------------------------------------------------------------
Outstanding at December 31, 2006 83,914 $16.19 4.46
----------------------------------------------------------------
Exercisable at December 31, 2006 33,877 $16.52 4.18
----------------------------------------------------------------
The options outstanding as of December 31, 2006 are set forth below:
Weighted Weighted
Average Average
Options Exercise Remaining
Exercise price Outstanding Price Life (Years)
-------------- ----------- -------- ------------
$9.00-$11.99 3,975 $ 9.71 2.00
$12.00-$14.99 29,615 13.06 3.46
$15.00-$17.99 18,583 16.22 5.00
$18.00-$21.99 31,741 19.00 5.40
------------------------------------------------------------------
Outstanding at December 31, 2006 83,914 $16.19 4.46
------------------------------------------------------------------
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
date through the date of settlement. The total compensation cost recognized for
the year ended December 31, 2006 was $368,450.
12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The 2005 Equity Incentive Compensation Plan ("2005 Plan"), adopted at the 2005
Annual Meeting, 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, including both performance and nonperformance-based
restricted stock. Performance-based restricted stock awards vest at the end of
a specified three year period, with the ultimate number of shares earned
contingent on achieving certain performance targets. If performance targets are
not achieved, all or a portion of the performance-based restricted shares are
forfeited and become available for future grants. Nonperformance-based
restricted stock awards vest ratably over a three year period and
nonperformance-based restricted stock units (granted to non-employee directors)
vest over a one year period. It is the current intention that employee grants
will be performance-based. The 2005 Plan provides for accelerated vesting in
the event of death or retirement. Non-employee directors also may elect to
defer a portion of their cash compensation, with such deferred amount to be
paid by delivery of deferred stock units. Outstanding awards were granted at
fair market value on grant date. The number of shares of Common Stock which
remain available for future grants under the 2005 Plan at December 31, 2006 is
845,044 shares.
The Corporation pays dividends and dividend equivalent on outstanding awards,
which are charged to net assets when paid. Dividends and dividend equivalents
paid on restricted awards that are later forfeited are reclassified to
compensation expense.
A summary of the status of the Corporations's awards granted under the 2005
Plan as of December 31, 2006, and changes during the period then ended is
presented below:
Weighted Average
Shares/ Grant-Date Fair
Awards Units Value
------ ----- ----------------
Balance at December 31, 2005 8,630 $28.35
Granted:
Restricted stock 13,025 34.32
Restricted stock units 4,000 33.21
Deferred stock units 1,289 33.54
Vested (5,546) 28.51
---------------------------------------------------------------
Balance at December 31, 2006 (includes
13,025 performance-based awards and
8,373 nonperformance-based awards) 21,398 $33.16
---------------------------------------------------------------
Compensation costs resulting from awards granted under the 2005 Plan are based
on the fair value of the award on grant date (determined by the average of the
high and low price on grant date) and recognized on a straight-line basis over
the requisite service period. For those awards with performance conditions,
compensation costs are based on the most probable outcome and, if such goals
are not met, compensation cost is not recognized and any previously recognized
compensation cost is reversed. The total compensation costs for restricted
stock granted to employees for the year ended December 31, 2006 were $194,555.
The total compensation costs for restricted stock units granted to non-employee
directors for the year ended December 31, 2006 were $157,778. As of December
31, 2006, there were total unrecognized compensation costs of $387,049, a
component of additional capital surplus, related to nonvested equity-based
compensation arrangements granted under the 2005 Plan. Those costs are expected
to be recognized over a weighted average period of 1.76 years. The total fair
value of shares vested during the years ended December 31, 2006 and 2005 was
$196,956 and $12,500.
7. EXPENSES
The aggregate remuneration paid during the year ended December 31, 2006 to
officers and directors amounted to $2,208,421, of which $376,911 was paid as
fees to directors who were not officers. These amounts represent the taxable
income to the Corporation's officers and directors and therefore differ from
the amounts reported in the accompanying Statement of Operations that are
recorded and expensed in accordance with generally accepted accounting
principles.
8. PORTFOLIO SECURITIES LOANED
The Corporation makes loans of securities to brokers, secured by cash, 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. At December 31, 2006, the Corporation had securities on loan
of $42,198,831, and held collateral of $43,181,867, consisting of an investment
trust fund which may invest in money market instruments, commercial paper,
repurchase agreements, U.S. Treasury Bills, and U.S. agency obligations.
9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing the Fund's tax returns
to determine whether the tax positions are "more-likely-than-not" of being
sustained
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
by the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold would be recorded as a tax benefit or expense in
the current year. Adoption of FIN 48 is required to be implemented no later
than the Corporation's June 29, 2007 net asset value. The application of FIN 48
is not expected to materially impact the Corporation's financial statements.
In September 2006, the FASB released Statement of Financial Accounting Standard
No. 157, Fair Value Measurement ("FAS 157"), which provides enhanced guidance
for using fair value to measure assets and liabilities. The standard requires
companies to provide expanded information about the assets and liabilities
measured at fair value and the potential effect of these fair valuations on an
entity's financial performance. The standard does not expand the use of fair
value in any new circumstances, but provides clarification on acceptable fair
valuation methods and applications. Adoption of FAS 157 is required for fiscal
years beginning after November 15, 2007. Application of the standard is not
expected to materially impact the Corporation's financial statements.
14
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------------
2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of year $35.24 $28.16 $24.06 $20.98 $24.90
-----------------------------------------------------------------------------------------------------
Net investment income 0.47 0.53* 0.41 0.38 0.42
Net realized gains and increase (decrease)
in unrealized appreciation 4.91 8.29 5.05 3.89 (3.20)
Adjustment to apply
FASB Statement No. 158 (note 5) (0.09) -- -- -- --
-----------------------------------------------------------------------------------------------------
Total from investment operations 5.29 8.82 5.46 4.27 (2.78)
-----------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.47) (0.56) (0.44) (0.38) (0.43)
Distributions from net realized gains (3.33) (1.22) (0.88) (0.81) (0.68)
-----------------------------------------------------------------------------------------------------
Total distributions (3.80) (1.78) (1.32) (1.19) (1.11)
-----------------------------------------------------------------------------------------------------
Capital share repurchases 0.15 0.10 0.01 0.02 0.01
Reinvestment of distributions (0.27) (0.06) (0.05) (0.02) (0.04)
-----------------------------------------------------------------------------------------------------
Total capital share transactions (0.12) 0.04 (0.04) 0.00 (0.03)
-----------------------------------------------------------------------------------------------------
Net asset value, end of year $36.61 $35.24 $28.16 $24.06 $20.98
-----------------------------------------------------------------------------------------------------
Per share market price, end of year $33.46 $32.34 $25.78 $23.74 $19.18
-----------------------------------------------------------------------------------------------------
Total Investment Return
Based on market price 15.3% 32.3% 14.4% 30.8% (13.7)%
Based on net asset value 15.7% 32.0% 23.3% 21.2% (11.1)%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $812,047 $761,914 $618,887 $522,941 $451,275
Ratio of expenses to average net assets 0.60% 0.59% 0.56% 0.74% 0.49%
Ratio of net investment income to average net assets 1.22% 1.61% 1.58% 1.75% 1.84%
Portfolio turnover 9.95% 10.15% 13.44% 10.20% 9.69%
Number of shares outstanding at end of year
(in 000's) 22,181 21,621 21,980 21,737 21,510
-----------------------------------------------------------------------------------------------------
* In 2005 the Fund received dividend income of $3,032,857, or $0.14 per share,
as a result of Precision Drilling Corp.'s reorganization.
15
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
December 31, 2006
Shares Value (A)
-----------------------------------------------------------------
Stocks and Convertible Securities -- 96.8%
Energy -- 89.5%
Integrated -- 39.5%
BP plc ADR.......................... 330,000 $ 22,143,000
Chevron Corp........................ 635,000 46,691,550
ConocoPhillips...................... 556,891 40,068,307
Exxon Mobil Corp.................... 1,245,000 95,404,350
Hess Corp. (B)...................... 195,000 9,666,150
Holly Corp.......................... 370,000 19,018,000
Marathon Oil Co..................... 120,000 11,100,000
Murphy Oil Corp..................... 216,500 11,009,025
Royal Dutch Shell plc ADR........... 275,000 19,467,250
Suncor Energy....................... 100,000 7,891,000
Total S.A. ADR...................... 220,000 15,822,400
Valero Energy Corp.................. 435,000 22,254,600
------------
320,535,632
------------
Exploration & Production -- 14.8%
Apache Corp......................... 158,200 10,521,882
Devon Energy Corp................... 340,000 22,807,200
EOG Resources, Inc.................. 320,000 19,984,000
Newfield Exploration Co. (B)(C)..... 175,000 8,041,250
Noble Energy, Inc. (B).............. 430,000 21,100,100
Occidental Petroleum Corp........... 400,000 19,532,000
XTO Energy Inc...................... 390,000 18,349,500
------------
120,335,932
------------
Utilities -- 13.7%
AGL Resources Inc................... 170,000 6,614,700
Duke Energy Corp.................... 217,624 7,227,293
Energen Corp........................ 400,000 18,776,000
Equitable Resources, Inc. (B)....... 450,000 18,787,500
MDU Resources Group, Inc............ 375,000 9,615,000
National Fuel Gas Co. (B)........... 200,000 7,708,000
New Jersey Resources Corp........... 200,000 9,716,000
Questar Corp........................ 200,000 16,610,000
SEMCO Energy, Inc. (C).............. 670,300 4,088,830
Williams Companies, Inc............. 450,000 11,754,000
------------
110,897,323
------------
16
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2006
Shares Value (A)
-----------------------------------------------------------------
Services -- 21.5%
Baker Hughes Inc...................... 205,000 $ 15,305,300
BJ Services Co........................ 740,000 21,696,800
Bronco Drilling Co., Inc. (C)......... 4,600 79,074
ENSCO International, Inc. (B)......... 209,150 10,470,049
GlobalSantaFe Corp. (B)............... 290,000 17,046,200
Grant Prideco Inc. (C)................ 308,000 12,249,160
Hercules Offshore, Inc. (C)........... 160,000 4,624,000
Nabors Industries Ltd. (C)............ 520,000 15,485,600
Noble Corp............................ 200,000 15,230,000
Schlumberger Ltd...................... 560,000 35,369,600
TODCO (C)............................. 200,000 6,834,000
Weatherford International Ltd. (C).... 493,560 20,625,872
------------
175,015,655
------------
Basic Industries -- 7.3%
Basic Materials & Other -- 7.3%
Air Products and Chemicals, Inc....... 125,000 8,785,000
Aqua America, Inc. (B)................ 352,000 8,018,560
duPont (E.I.) de Nemours and Co....... 157,500 7,671,825
Florida Rock Industries Inc. (B)...... 105,000 4,520,250
General Electric Co................... 454,800 16,923,108
Martin Marietta Materials, Inc........ 30,000 3,117,300
Rohm & Haas Co........................ 200,000 10,224,000
------------
59,260,043
------------
Total Stocks and Convertible Securities
(Cost $323,839,225) (D)................... $786,044,585
------------
17
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2006
Prin. Amt. Value (A)
-----------------------------------------------------------------------------------------
Short-Term Investments -- 3.5%
U.S. Government Obligations -- 0.5%
U.S. Treasury Bills, 4.93%, due 2/15/07..................... $4,000,000 $ 3,975,350
------------
Time Deposit -- 0.0%
Bank of America Corp., 4.55%, due 1/2/07.................... 259,497
------------
Commercial Paper -- 3.0%
Cargill Global Funding, 5.25%, due 1/16/07.................. 4,800,000 4,789,500
Chevron Funding Co., 5.20-5.24%, due 1/4/07-1/11/07......... 7,000,000 6,992,674
Coca-Cola Enterprises, 5.26%, due 1/23/07................... 2,000,000 1,993,571
General Electric Capital Corp., 5.24%, due 1/9/07........... 6,000,000 5,993,013
Nestle Capital Co., 5.22%, due 1/18/07...................... 4,400,000 4,389,164
------------
24,157,922
------------
Total Short-Term Investments
(Cost $28,392,769)............................................ 28,392,769
------------
Total Securities Lending Collateral -- 5.3%
(Cost $43,181,867)............................................
Brown Brothers Investment Trust, 5.26%, due 1/2/07.......... 43,181,867
------------
Total Investments -- 105.6%
(Cost $395,413,861)........................................... 857,619,221
Cash, receivables, prepaid expenses and other assets, less
liabilities -- (5.6)%..................................... (45,571,982)
------------
Net Assets -- 100%.............................................. $812,047,239
--------------------------------------------------------------------------------
Notes:
(A) See note 1 to financial statements. Securities are listed on the New York
Stock Exchange, the American Stock Exchange, or the NASDAQ, except
restricted securities.
(B) All or a portion of these securities are on loan. See Note 8 to Financial
Statements.
(C) Presently non-dividend paying.
(D) The aggregate market value of stocks held in escrow at December 31, 2006
covering open call option contracts written was $9,251,575. In addition,
the required aggregate market value of securities segregated by the
custodian to collaterize open put option contracts written was $3,600,000.
18
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
--------------------------------------------------------------------------------
December 31, 2006
Contracts Contract
(100 shares Strike Expiration Appreciation/
each) Security Price Date (Depreciation)
-------------------------------------------------------------------------------------------------
COVERED CALLS
100 Holly Corp..................... $ 55 Jan 07..................... $ 15,199
200 Marathon Oil Co................ 100 Jan 07..................... 28,171
100 Marathon Oil Co................ 105 Apr 07.................. (1,275)
50 Martin Marietta Materials, Inc. 100 Jan 07..................... (19,150)
75 Martin Marietta Materials, Inc. 115 Jan 07..................... 6,149
300 Questar Corp................... 90 Jan 07..................... 47,098
200 Questar Corp................... 90 Apr 07.................. 46,317
100 Rohm & Haas Co................. 55 Jan 07..................... 7,700
----- --------
1,125 130,209
----- --------
COLLATERALIZED PUTS
100 Florida Rock Industries Inc.... 30 111Jan 07...... 10,200
250 Forest Oil Corp................ 30 Feb 07.................. 13,024
100 Marathon Oil Co................ 67.50 111Jan 07 10,700
100 Martin Marietta Materials, Inc. 75 Jan 07......... 10,482
100 Suncor Energy.................. 65 Mar... 07.................. 7,844
100 Valero Energy Corp............. 47.50 Jan 07.................. 10,200
----- --------
750 62,450
----- --------
$192,659
========
19
CHANGES IN PORTFOLIO SECURITIES
--------------------------------------------------------------------------------
During the Three Months Ended December 31, 2006
(unaudited)
Shares
--------------------------------------
Held
Additions Reductions Dec. 31, 2006
-------------------------------------------------------------------------------
Dynegy, Inc............................. 999/(1)/ 999 --
ENSCO International, Inc................ 75,000 209,150
SEMCO Energy, Inc....................... 231,700 670,300
Valero Energy Corp...................... 80,000 435,000
Arkema Inc.............................. 6,000 --
Aventine Renewable Energy Holdings, Inc. 40,000 --
BP plc ADR.............................. 95,000 330,000
CONSOL Energy Inc....................... 30,000 --
Holly Corp.............................. 50,000 370,000
Hugoton Royalty Trust................... 23,343 --
Pioneer Natural Resources Co............ 125,000 --
Total S.A. ADR.......................... 20,000 220,000
--------
/(1) /Received 999 shares Dynegy, Inc. and $22,520 from class action settlement.
20
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 December 31, 2006, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, 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 December 31, 2006 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 19, 2007
-------------------------
21
HISTORICAL FINANCIAL STATISTICS
--------------------------------------------------------------------------------
(unaudited)
Dividends Distributions Total
Market From From Net Dividends
Net Asset Value Investment Realized and Annual Rate
Value of Shares Value Per Income Gains Distributions of
Dec. 31 Net Assets Outstanding* Per Share* Share* Per Share* Per Share* Per Share* Distribution**
---------------------------------------------------------------------------------------------------------
1992 $320,241,282 17,369,255 $18.44 $16.83 $.51 $ .82 $1.33 7.55%
1993 355,836,592 18,010,007 19.76 18.33 .55 .87 1.42 7.55
1994 332,279,398 18,570,450 17.89 16.83 .61 .79 1.40 7.40
1995 401,404,971 19,109,075 21.01 18.83 .58 .81 1.39 7.57
1996 484,588,990 19,598,729 24.73 23.17 .55 .88 1.43 6.84
1997 556,452,549 20,134,181 27.64 24.33 .51 1.04 1.55 6.37
1998 474,821,118 20,762,063 22.87 20.42 .52 1.01 1.53 6.48
1999 565,075,001 21,471,270 26.32 21.50 .48 1.07 1.55 7.00
2000 688,172,867 21,053,644 32.69 27,31 .39 1.35 1.74 6.99
2001 526,491,798 21,147,563 24.90 23.46 .43 1.07 1.50 5.61
2002 451,275,463 21,510,067 20.98 19.18 .43 .68 1.11 5.11
2003 522,941,279 21,736,777 24.06 23.74 .38 .81 1.19 5.84
2004 618,887,401 21,979,676 28.16 25.78 .44 .88 1.32 5.40
2005 761,913,652 21,621,072 35.24 32.34 .56 1.22 1.78 5.90
2006 812,047,239 22,180,867 36.61 33.46 .47 3.33 3.80 11.26
--------
*Adjusted for 3-for-2 stock split effected in October 2000.
** The Annual Rate of Distribution is the total dividends and capital gain
distributions during the year divided by the average daily market price of the
Corporation's Common Stock.
-------------------------
Common Stock
Listed on the New York Stock 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.
22
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 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 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".
ANNUAL CERTIFICATION
The Corporation's CEO has submitted to the New York Stock Exchange the annual
CEO certification as required by Section 303A.12(a) of the NYSE Listed Company
Manual.
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, 2006 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 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
Corporation's actual results are the performance of the portfolio of stocks
held by the Corporation, the conditions in the U.S. and international
financial, petroleum and other markets, the price at which shares of the
Corporation will trade in the public markets, and other factors discussed in
the Corporation's periodic filings with the Securities and Exchange Commission.
PRIVACY POLICY
In order to conduct its business, the Corporation, through its transfer agent,
currently American Stock Transfer & Trust Company, 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.
23
SPECIAL STOCKHOLDER MEETING
--------------------------------------------------------------------------------
A special meeting of stockholders was held on Tuesday, November 7, 2006. The
purpose of the meeting was to approve a comprehensive rewriting and updating of
the Corporation's corporate charter. All of the proposed charter amendments
were approved by the stockholders. The results of the voting on the eight
proposals were as follows:
For Against Abstain
--------------------------------------------------------------------------------------
Proposal 1 -- Purpose of the Corporation................. 11,832,131 930,080 591,454
Proposal 2 -- Classification, designation, etc., of stock 11,526,879 1,222,095 604,682
Proposal 3 -- Stockholder voting......................... 11,335,381 1,383,635 634,641
Proposal 4 -- Stockholder election of directors.......... 11,527,155 1,205,781 620,724
Proposal 5 -- Power to amend bylaws...................... 11,167,482 1,527,621 658,552
Proposal 6 -- Quorum for stockholder meetings............ 11,502,023 1,213,356 638,279
Proposal 7 -- Determinations by the Board................ 11,462,952 1,224,791 665,914
Proposal 8 -- Miscellaneous conforming amendments........ 11,470,707 1,193,416 689,536
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.
24
SHAREHOLDER INFORMATION AND SERVICES
--------------------------------------------------------------------------------
WE ARE OFTEN ASKED --
How do I invest in Petroleum & Resources?
Petroleum & Resources Common Stock is listed on the New York Stock Exchange.
The stock's ticker symbol is "PEO" and may be bought and sold through
registered investment security dealers. Your broker will be able to assist you
in this regard. In addition, stock may be purchased through our transfer agent,
American Stock Transfer & Trust Company's INVESTORS CHOICE Plan (see page 26).
Where do I get information on the stock's price, trading and/or net asset value?
The daily net asset value (NAV) per share and closing market price may be
obtained from our website at www.peteres.com. The daily NAV is also available
on the NASDAQ Mutual Fund Quotation System under the symbol XPEOX. The
week-ending NAV is published on Saturdays in various newspapers.
Petroleum's daily trading is shown in the stock tables of many daily
newspapers, often with the abbreviated form "PetRs." Local newspapers
determine, usually by volume of traded shares, which securities to list. If
your paper does not carry our listing, please telephone the Corporation at
(800) 638-2479 or visit our website.
How do I replace a lost certificate(s) or how do I correct a spelling error on
my certificate?
Your Petroleum stock certificates are valuable documents and should be kept in
a safe place. For tax purposes, keep a record of each certificate, including
the cost or market value of the shares it covers at the time acquired. If a
certificate is lost, destroyed or stolen, notify the transfer agent immediately
so a "stop transfer" order can be placed on the records to prevent an
unauthorized transfer of your certificate. The necessary forms and requirements
to permit the issuance of a replacement certificate will then be sent to you. A
certificate can be replaced only after the receipt of an affidavit regarding
the loss accompanied by an open surety bond, for which a small premium is paid
by the stockholder.
In the event a certificate is issued with the holder's name incorrectly
spelled, a correction can only be made if the certificate is returned to the
transfer agent with instructions for correcting the error. Transferring shares
to another name also requires that the certificate be forwarded to the transfer
agent with the appropriate assignment forms completed and the signature of the
registered owner Medallion guaranteed by a bank or member firm of The New York
Stock Exchange, Inc.
Is direct deposit of my dividend checks available?
Yes, our transfer agent offers direct deposit of your interim dividend and
year-end distribution checks. You can request direct deposit with American
Stock Transfer either on-line or by calling them at the phone number provided
on page 26.
Who do I notify of a change of address?
The transfer agent.
We go to Florida (Arizona) every winter. How do we get our mail from Petroleum
& Resources?
The transfer agent can program a seasonal address into its system; simply send
the temporary address and the dates you plan to be there to the transfer agent.
I want to give shares to my children, grandchildren, etc., as a gift. How do I
go about it?
Giving shares of Petroleum is simple and is handled through our transfer agent.
The stock transfer rules are clear and precise for most forms of transfer. They
will vary slightly depending on each transfer, so write to the transfer agent
stating the exact intent of your gift plans and the transfer agent will send
you the instructions and forms necessary to effect your transfer.
How do I transfer shares held at American Stock Transfer (AST)?
There are many circumstances that require the transfer of shares to new
registrations, e.g., marriage, death, a child reaching the age of maturity, or
giving shares as a gift. Each situation requires different forms of
documentation to support the transfer. You may obtain transfer instructions and
download the necessary forms from our transfer agent's website:
www.amstock.com. Click on Shareholder Services, then General Shareholder
Information and Transfer Instructions.
25
SHAREHOLDER INFORMATION AND SERVICES (CONTINUED)
--------------------------------------------------------------------------------
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(waived if sold) $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 10269-0560
Website: www.amstock.com
E-mail: info@amstock.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.
26
BOARD OF DIRECTORS
--------------------------------------------------------------------------------
Number of
Portfolios
in Fund
Position Term Length Complex
Personal Held with of of Time Principal Occupations Overseen Other
Information the Fund Office Served During the Last 5 Years by Director Directorships
--------------------------------------------------------------------------------------------------------------------------
Independent Directors
Enrique R. Arzac, Ph.D. Director One Since Professor of Finance and Two Director of The Adams
7 St. Paul Street, Year 1987 Economics, formerly, Vice Express Company and Credit
Suite 1140 Dean of Academic Affairs of Suisse Asset Management
Baltimore, MD 21202 the Graduate School of Funds (28 funds) (investment
Age 65 Business, Columbia University. companies).
--------------------------------------------------------------------------------------------------------------------------
Phyllis O. Bonanno Director One Since President & CEO of Two Director of The Adams
7 St. Paul Street, Year 2003 International Trade Solutions, Express Company
Suite 1140 Inc. (consultants). Formerly, (investment company), Borg-
Baltimore, MD 21202 President of Columbia College, Warner Inc. (industrial),
Age 63 Columbia, South Carolina, and Mohawk Industries Inc.
Vice President of Warnaco Inc. (carpets and flooring).
(apparel).
--------------------------------------------------------------------------------------------------------------------------
Daniel E. Emerson Director One Since Chairman, The National Two Director of The Adams
7 St. Paul Street, Year 1987 YMCA Fund Inc. Retired Express Company
Suite 1140 Executive Vice President of (investment company).
Baltimore, MD 21202 NYNEX Corp.
Age 82 (communications), retired
Chairman of The Board of both
NYNEX Information
Resources Co. and NYNEX
Mobile Communications Co.
Previously Executive Vice
President and Director of New
York Telephone Company.
--------------------------------------------------------------------------------------------------------------------------
Frederic A. Escherich Director One Since Private Investor. Formerly, Two Director of The Adams
7 St. Paul Street, Year 2006 Managing Director and head of Express Company
Suite 1140 Mergers and Acquisitions (investment company).
Baltimore, MD 21202 Research and the Financial
Age 54 Advisory Department with J.P.
Morgan.
--------------------------------------------------------------------------------------------------------------------------
Roger W. Gale Director One Since President & CEO of GF Two Director of The Adams
7 St. Paul Street, Year 2005 Energy, LLC (consultants to Express Company
Suite 1140 electric power companies). (investment company), Ormat
Baltimore, MD Formerly, member of (geothermal and renewable
21202 management group, PA energy), and U.S. Energy
Age 60 Consulting Group (energy Association.
consultants).
--------------------------------------------------------------------------------------------------------------------------
Thomas H. Lenagh Director One Since Financial Advisor. Formerly, Two Director of The Adams
7 St. Paul Street, Year 1987 Chairman of the Board and Express Company,
Suite 1140 CEO of Greiner Engineering Cornerstone Funds, Inc.
Baltimore, MD 21202 Inc. (formerly Systems (2 funds) (investment
Age 88 Planning Corp.) (consultants). companies), and Photonics
Formerly, Treasurer and Chief Product Group (crystals).
Investment Officer of the Ford
Foundation (charitable
foundation).
--------------------------------------------------------------------------------------------------------------------------
27
BOARD OF DIRECTORS (CONTINUED)
--------------------------------------------------------------------------------
Number of
Portfolios
in Fund
Position Term Length Complex
Personal Held with of of Time Principal Occupations Overseen Other
Information the Fund Office Served During the Last 5 Years by Director Directorships
--------------------------------------------------------------------------------------------------------------------------
Independent Directors (continued)
Kathleen T. McGahran, Director One Since Principal & Director of Pelham Two Director of The Adams
Ph.D., J.D., C.P.A Year 2003 Associates, Inc. (executive Express Company
7 St. Paul Street, education), Adjunct Associate (investment company).
Suite 1140 Professor, Columbia Executive
Baltimore, Md 21202 Education, Graduate School of
Age 56 Business, Columbia University.
Formerly, Associate Dean and
Director of Executive
Education, and Associate
Professor, Columbia
University.
--------------------------------------------------------------------------------------------------------------------------
John J. Roberts Director One Since Retired Senior Advisor, Two Director of The Adams
7 St. Paul Street, Year 1987 formerly, Vice-Chairman Express Company
Suite 1140 External Affairs, American (investment company) and
Baltimore, MD 21202 International Group, Inc. Honorary Director of
Age 84 (insurance). Formerly, American International
Chairman and CEO of Group, Inc.
American International
Underwriters Corporation.
Previously, President of
American International
Underwriters Corporation-U.S./
Overseas Operations.
--------------------------------------------------------------------------------------------------------------------------
Craig R. Smith, M.D. Director One Since President, Williston Consulting Two Director of The Adams
7 St. Paul Street, Year 2005 LLC (consultants to Express Company
Suite 1140 pharmaceutical and (investment company),
Baltimore, MD 21202 biotechnology industries). LaJolla Pharmaceutical
Age 60 Formerly, Chairman, President Company, and Depomed, Inc.
& CEO of Guilford (specialty pharmaceuticals).
Pharmaceuticals
(pharmaceuticals and
biotechnology).
--------------------------------------------------------------------------------------------------------------------------
Interested Director
Douglas G. Ober Director, One Director Chairman & CEO of the Two Director of The Adams
7 St. Paul Street, Chairman, Year since Corporation and The Adams Express Company
Suite 1140 President 1989; Express Company. (investment company).
Baltimore, MD 21202 and CEO Chairman
Age 60 of the
Board
since
1991
--------------------------------------------------------------------------------------------------------------------------
28
PETROLEUM & RESOURCES CORPORATION
--------------------------------------------------------------------------------
Board Of Directors
Enrique R. Arzac/(1)(3) / Thomas H. Lenagh/(1)(4) /
Phyllis O. Bonanno/(1)(4)/ Kathleen T.
McGahran/(2)(4)/
Daniel E. Emerson/(2)(3) /
Douglas G. Ober/(1)/
Frederic A.
Escherich/(2)(3)/ John J. Roberts/(1)(3)/
Roger W. Gale/(1)(3)/ Craig R. Smith/(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
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
Robert E. Sullivan Vice President -- Research
Christine M. Sloan Assistant Treasurer
Geraldine H. Pare Assistant Secretary
[GRAPHIC]
Petroleum
& Resources
Corporation
PETROLEUM & RESOURCES CORPORATION
Seven St. Paul Street, Suite 1140
BALTIMORE, MD 21202
(410)752-5900 or (800)638-2479
Contact us on the Web at: www.peteres.com
Item 2. Code of Ethics.
On June 12, 2003, the Board of Directors adopted a code of
ethics that applies to registrant's principal executive
officer and principal financial officer. The code of ethics
is available on registrant's website at: www.peteres.com.
Since the code of ethics was adopted there have been no
amendments to it nor have any waivers from any its
provisions been granted.
Item 3. Audit Committee Financial Expert.
The board of directors has determined that at least one of
the members of registrant's audit committee meets the
definition of audit committee financial expert as that term
is defined by the Securities and Exchange Commission. The
director on the registrant's audit committee whom the board
of directors has determined meets such definition is
Kathleen T. McGahran, who is independent pursuant to
paragraph (a)(2) of this Item.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate fees for professional
services rendered by its independent auditors,
PricewaterhouseCoopers LLP, for the audits of the
Corporation's annual and semi-annual financial statements
for 2006 and 2005 were $64,160 and $55,310, respectively.
(b) Audit Related Fees. There were no audit-related
fees in 2006 and 2005.
(c) Tax Fees. The aggregate fees to registrant for
professional services rendered by PricewaterhouseCoopers LLP
for the review of registrant's excise tax calculations and
preparations of federal, state and excise tax returns for
2006 and 2005 were $9,523 and $8,900, respectively.
(d) All Other Fees. The aggregate fees to registrant
by PricewaterhouseCoopers LLP other than for the services
referenced above for 2006 and 2005 were $6,156 and $800,
respectively. The $6,156 for services in 2006 related to
the review of the Corporation's procedures for calculating
the amounts to be paid or granted to the Corporation's
officers in accordance with the Corporation's cash incentive
plan and the 2005 Equity Incentive Compensation Plan, review
of the Corporation's calculations related to those plans,
and preparation of a report to the Corporation's
Compensation Committee.
(e) (1) Audit Committee Pre-Approval Policy. As of
2006, all services to be performed for registrant by
PricewaterhouseCoopers LLP must be pre-approved by the audit
committee. All services performed in 2006 were pre-approved
by the committee.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate fees by PricewaterhouseCoopers LLP
for non-audit professional services rendered to registrant
for 2006 and 2005 were $15,679 and $9,700, respectively.
(h) The registrant's audit committee has considered
the provision by PricewaterhouseCoopers LLP of the non-audit
services described above and found that they are compatible
with maintaining PricewaterhouseCoopers LLPs independence.
Item 5. Audit Committee of Listed registrant's.
(a) The registrant has a standing audit committee
established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934. The members of the audit
committee are: Kathleen T. McGahran, chair, Daniel E.
Emerson, Frederic A. Escherich, and Craig R. Smith.
(B) Not applicable.
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.
PROXY VOTING GUIDELINES
Petroleum & Resources Corporation (Petroleum) follows long-
standing general guidelines for the voting of portfolio
company proxies and takes very seriously its responsibility
to vote all such proxies. The portfolio company proxies are
evaluated by our research staff and voted by our portfolio
management team, and we annually provide the Board of
Directors with a report on how proxies were voted during the
previous year. We do not use an outside service to assist us
in voting our proxies.
As an internally-managed investment company, Petroleum uses
its own staff of research analysts and portfolio managers.
In making the decision to invest in a company for the
portfolio, among the factors the research team analyses is
the integrity and competency of the company's management. We
must be satisfied that the companies we invest in are run by
managers with integrity. Therefore, having evaluated this
aspect of our portfolio companies' managements, we give
significant weight to the recommendations of the company's
management in voting on proxy issues.
We vote proxies on a case-by-case basis according to what we
deem to be the best long-term interests of our shareholders.
The key over-riding principle in any proxy vote is that
stockholders be treated fairly and equitably by the
portfolio company's management. In general, on the election
of directors and on routine issues that we do not believe
present the possibility of an adverse impact upon our
investment, after reviewing whether applicable corporate
governance requirements as to board and committee
composition have been met, we will vote in accordance with
the recommendations of the company's management. When we
believe that the management's recommendation is not in the
best interests of our stockholders, we will vote against
that recommendation.
Our general guidelines for when we will vote contrary to the
recommendation of the portfolio company management's
recommendation are:
Stock Options
Our general guideline is to vote against stock option plans
that we believe are unduly dilutive of our stock holdings in
the company. We use a general guideline that we will vote
against any stock option plan that results in dilution in
shares outstanding exceeding 4%. Most stock option plans are
established to motivate and retain key employees and to
reward them for their achievement. An analysis of a stock
option plan can not be made in a vacuum but must be made in
the context of the company's overall compensation scheme. In
voting on stock option plans, we give consideration to
whether the stock option plan is broad-based in the number
of employees who are eligible to receive grants under the
plan. We generally vote against plans that permit re-pricing
of grants or the issuance of options with exercise prices
below the grant date value of the company's stock.
Corporate Control/Governance Issues
Unless we conclude that the proposal is favorable to our
interests as a long-term shareholder in the company, we have
a long-standing policy of voting against proposals to create
a staggered board of directors. In conformance with that
policy, we will generally vote in favor of shareholder
proposals to eliminate the staggered election of directors.
Unless we conclude that the proposal is favorable to our
interests as a long-term shareholder in the company, our
general policy is to vote against amendments to a company's
charter that can be characterized as blatant anti-takeover
provisions.
With respect to so-called golden parachutes and other
severance packages, it is our general policy to vote against
proposals relating to future employment contracts that
provide that compensation will be paid to any director,
officer or employee that is contingent upon a merger or
acquisition of the company.
We generally vote for proposals to require that the majority
of a board of directors consist of independent directors and
vote against proposals to establish a retirement plan for
non-employee directors.
We have found that most stockholder proposals relating to
social issues focus on very narrow issues that either fall
within the authority of the company's management, under the
oversight of its board of directors, to manage the day-to-
day operations of the company or concern matters that are
more appropriate for global solutions rather than company-
specific ones. We consider these proposals on a case-by-case
basis but usually are persuaded managements position is
reasonable and vote in accordance with managements
recommendation on these types of proposals.
Item 8. Portfolio Managers of Closed-End Management
Investment Companies.
(a) (1) Douglas G. Ober, Chairman, Chief Executive Officer,
and President, and Joseph M. Truta, Executive Vice
President, comprise the 2 person portfolio management
team for the registrant. Mr. Ober and Mr. Truta have
served as portfolio managers for the registrant since
1991. This information is as of February 15, 2007. Mr.
Ober is the lead member of the portfolio management
team. Mr. Ober and Mr. Truta receive investment
recommendations from a team of research analysts and
make decisions jointly about any equity transactions in
the portfolio. Concurrence of both portfolio managers
is required for an investment recommendation to be
approved.
(2) Mr. Ober and Mr. Truta also comprise the
portfolio management team for registrant's non-
controlled affiliate, The Adams Express Company
(Adams), a registered investment company with total
net assets of $1,377,418,310 as of December 31, 2006.
Mr. Ober is Chairman and Chief Executive Officer of
Adams and Mr. Truta is President. This information is
as of February 15, 2007. The Petroleum fund is a non-
diversified fund focusing on the energy and natural
resources sectors and Adams is a diversified fund with
a different focus, and there are few material
conflicts of interest that may arise in connection
with the portfolio managers' management of both funds.
The funds do not buy or sell securities or other
portfolio holdings to or from the other, and
procedures and policies are in place covering the
sharing of expenses and the allocation of investment
opportunities, including bunched orders and
investments in initial public offerings, between the
funds.
(3) The portfolio managers are compensated through a
three-component plan, consisting of salary, annual cash
incentive compensation, and equity incentive
compensation. The value of each component in any year
is determined by the Compensation Committee, comprised
solely of independent director members of the Board of
Directors. Salaries are determined by using
appropriate industry surveys and information about the
local market as well as general inflation statistics.
Cash incentive compensation is based on a combination
of absolute and relative fund performance over one and
three year periods as well as individual success at
meeting goals and objectives set by the Board of
Directors at the beginning of each year. Target
incentives are set based on 80% of salary for the Chief
Executive Officer and 60% of salary for the Executive
Vice President. Two-thirds of each individual's annual
cash incentive is based on fund performance and one
third on individual success. The portion based on
performance is determined using a scale in which the
target can be earned by absolute fund pre-tax
performance of 10%. The scale ranges from zero to 125%
of target. The result is then modified by an average
of the one and three year performance of the fund
relative to that of the Dow Jones Oil and Gas Index
(DJOGI) and the S&P 500 Index, with 70% based upon the
relative performance of the fund compared to the DJOGI
and 30% based on the relative performance compared to
the S&P 500. Each one percent outperformance or
underperformance by the fund adds or deducts 5% from
the percentage of target earned based on the scale.
The maximum percentage of target which may be earned is
200% and the minimum is zero. Equity incentive
compensation, based on a plan approved by shareholders
in 2005, can take several forms. Following approval of
the plan, grants of restricted stock were made to the
portfolio managers in January 2006, with vesting in
equal proportions over a three year period. The size
of the grants was determined by the Compensation
Committee with the assistance of an outside
compensation consultant. Grants of restricted stock
were also made on January 12, 2006, that will vest at
the end of three years, but only upon the achievement
of specified performance criteria; certain percentages
of the target number of shares will be deemed to have
been earned based on achieving performance goals over
specified intervening time periods. The benchmark used
to measure performance is a hypothetical portfolio
comprised of a 80/20 blend of the Dow Jones Oil and Gas
Index and the S&P 500 Index ("Hypothetical Portfolio").
The first one-sixth of the target number of restricted
shares would have been earned if, on January 1, 2007,
the Corporation's one year total NAV return met or
exceeded the one year total NAV return of the
Hypothetical Portfolio. Because the Corporation's NAV
return trailed that of the Hypothetical Portfolio on
that date, only 52.1% of the first one-sixth of the
target number was earned. For the next one-third of
the target number of shares, those shares will be
deemed to have been earned if, on January 1, 2008, the
Corporation's two year total NAV return meets or
exceeds that of the Hypothetical Portfolio, with a
lesser percentage or no shares being earned if the
Corporation's total NAV return trails that of the
Hypothetical Portfolio, depending on the level of
underperformance on that date. The remaining 50% of
the target shares will be deemed to have been earned
if, on January 1, 2009, the Corporation's three year
total NAV return meets or exceeds that of the
Hypothetical Portfolio, with a lesser percentage or no
shares being earned if the Corporation's total NAV
return trails that of the Hypothetical Portfolio,
depending on the level of underperformance on that
date. In addition, if, on January 1, 2009, the
Corporation's three year total NAV return exceeds that
of the Hypothetical Portfolio, an additional number of
shares up to 50% of the target number of shares will be
earned and vest depending on the level of
outperformance. Dividends and capital gains paid on
the Corporation's shares of Common Stock ("dividends")
will be paid on all of the target number of shares of
restricted stock, when such dividends are paid on the
Common Stock, except that no dividends or capital gains
will be paid on any shares that are forfeited due to
the failure to achieve the performance criteria
described above. The basis for the cash incentive and
equity incentive compensation determinations for Adams
is the same as for Petroleum, except that the portion
of the cash incentive based upon fund performance uses
the S&P 500 Index as the benchmark, over a one and
three year period, and the benchmark used to measure
fund performance for equity incentive compensation is a
hypothetical portfolio comprised of a 50/50 blend of
the S&P 500 Index and the Lipper Large Cap Core Mutual
Fund Index. All of the above information is as of
December 31, 2006, except as noted.
(4) Using a valuation date of December 31, 2006, Mr.
Ober beneficially owns equity securities in registrant
of over $1,000,000. Mr. Truta beneficially owns equity
securities in registrant of over $1,000,000.
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. 2006 51,250 $ 34.92 51,250 983,427
Feb. 2006 88,000 $ 33.63 88,000 895,427
Mar. 2006 98,500 $ 32.81 98,500 796,427
Apr. 2006 59,400 $ 34.43 59,400 737,527
May 2006 60,200 $ 34.33 60,200 677,327
June 2006 97,350 $ 31.75 97,350 579,977
Jul. 2006 3,350 $ 34.78 3,350 576,627
Aug. 2006 67,500 $ 35.47 67,500 509,127
Sep. 2006 0 $ 0.00 0 509,127
Oct. 2006 141,600 $ 34.11 141,600 367,527
Nov. 2006 68,500 $ 34.62 68,500 299,027
Dec. 2006 92,309 $ 33.99 92,309 206,718
-------- --------- --------- --------- ---------
Total 827,959(1) $ 33.86 827,959(2) 206,718(2)
(1) There were no shares purchased other than through a
publicly announced plan or program.
(2.a) The Plan was extended on December 8, 2005 and was
reapproved on December 14, 2006.
(2.b) The share amount approved in 2005 was 5% of
outstanding shares, or approximately 1,060,377 shares, and
in 2006 was 5% of outstanding shares, or approximately
1,045,164 shares.
(2.c) Unless reapproved, the Plan will expire on or about
December 13, 2007.
(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.
Conclusions of principal officers concerning controls and
procedures.
(a) As of February 15, 2007, an evaluation was performed
under the supervision and with the participation of the
officers of registrant, including the principal executive
officer (PEO) and principal financial officer (PFO), of the
effectiveness of registrant's disclosure controls and
procedures. Based on that evaluation, the registrant's
officers, including the PEO and PFO, concluded that, as of
February 13, 2006, the registrant's disclosure controls and
procedures were reasonably designed so as to ensure that
material information relating to the registrant is made
known to the PEO and PFO.
(b) There have been no significant changes in the
registrant's internal control over financial reporting (as
defined in Rule 30a-3(d) under the Investment Company Act of
1940 (17 CFR 270.30a-3(d)) that occurred during the
registrant's last fiscal half-year that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits attached hereto. (Attach certifications as
exhibits)
(1) Not applicable. See registrant's response to Item 2,
above.
(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.
Signatures:
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: February 15, 2007
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: February 15, 2007
BY: /s/ Maureen A. Jones
-----------------------
Maureen A. Jones
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 15, 2007