cushing-royalty_nq.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM N-Q
 
 
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT
INVESTMENT COMPANY


Investment Company Act file number  811-22593


Cushing Royalty & Income Fund
(Exact name of registrant as specified in charter)


8117 Preston Road Suite 440
Dallas, TX 75225
(Address of principal executive offices) (Zip code)


Jerry V. Swank
8117 Preston Road Suite 440
Dallas, TX 75225
(Name and address of agent for service)


214-692-6334
Registrant's telephone number, including area code


Date of fiscal year end: November 30


Date of reporting period:  February 28, 2015
 
 
 
 
 
 
Item 1. Schedule of Investments.
 

The Cushing® Royalty & Income Fund
  
SCHEDULE OF INVESTMENTS (Unaudited)
  
             
   
February 28, 2015
  
             
         
Fair
  
Common Stock - 26.5%
  
Shares
    
Value
  
Integrated Oil & Gas - 16.0%
            
Canada - 2.0%
            
Cenovus Energy, Inc. (1)
     90,000     $ 1,556,100  
Netherlands - 3.0%
                
Royal Dutch Shell Plc (1)
     35,000       2,287,950  
United States - 11.0%
                
Chevron Corporation (1)
     21,000       2,240,280  
Exxon Mobil Corporation (1)
     35,600       3,152,024  
Occidental Petroleum Corporation
     39,300       3,060,684  
              12,297,038  
Oil & Gas Exploration & Production - 5.0%
                
United States - 5.0%
                
Anadarko Petroleum Corporation
     5,000       421,150  
ConocoPhillips Company
     12,327       803,721  
Devon Energy Corporation
     12,032       741,051  
EOG Resource, Inc.
     9,238       828,833  
Pioneer Natural Resource Company
     7,158       1,091,738  
              3,886,493  
Upstream - 5.5%
                
Canada - 5.5%
                
Arc Resources Ltd. (1)
     126,959       2,452,652  
Bonterra Energy Corporation (1)
     26,401       916,780  
Enerplus Corporation (1)
     82,273       832,603  
              4,202,035  
Total Common Stocks (Cost $21,961,126)
           $ 20,385,566  
                 
Master Limited Partnerships and Related Companies - 66.2%
                
Coal - 1.4%
                
United States - 1.4%
                
Natural Resource Partners, L.P.
     135,000     $ 1,070,550  
                 
Crude Oil & Refined Products - 2.5%
                
United States - 2.5%
                
Delek Logistics Partners, L.P.
     15,482       646,838  
NuStar Energy, L.P.
     19,900       1,254,496  
              1,901,334  
Large Cap Diversified - 2.6%
                
United States - 2.6%
                
ONEOK Partners, L.P.
     18,000       752,220  
Williams Partners, L.P.
     24,500       1,252,930  
              2,005,150  
Natural Gas Gatherers & Processors - 6.8%
                
United States - 6.8%
                
Enable Midstream Partners, L.P.
     110,000       1,980,000  
Regency Energy Partners, L.P.
     75,000       1,829,250  
 
 
 
 
 
Targa Resources Partners, L.P.
     32,800       1,437,296  
              5,246,546  
Other - 3.3%
                
Republic of the Marshall Islands - 3.3%
                
Seadrill Partners, LLC (1)
     142,400       2,180,144  
Transocean Partners, LLC (1)
     29,885       409,126  
              2,589,270  
Shipping - 7.2%
                
Republic of the Marshall Islands - 7.2%
                
Capital Products Partners, L.P. (1)
     321,265       2,987,764  
Golar LNG Partners, L.P. (1)
     97,000       2,532,670  
              5,520,434  
Upstream - 39.4%
                
United States - 39.4%
                
Atlas Resource Partners, L.P. (1)
     249,473       2,444,835  
BreitBurn Energy Partners, L.P.
     197,244       1,414,240  
Dorchester Minerals, L.P. (1)
     203,223       4,928,158  
EV Energy Partners, L.P. (1)
     298,055       4,518,514  
Legacy Reserves, L.P.
     403,658       4,642,067  
LRR Energy, L.P.
     67,228       550,597  
Memorial Production Partners, L.P. (1)
     295,291       5,365,438  
Mid-Con Energy Partners, L.P.
     247,357       1,518,772  
Vanguard Natural Resources, LLC
     299,361       4,963,405  
              30,346,026  
Variable Distribution - 3.0%
                
United States - 3.0%
                
Alon USA Partners, L.P.
     51,908       935,382  
CVR Refining, L.P.
     70,000       1,362,200  
              2,297,582  
Total Master Limited Partnerships and Related Companies (Cost $65,321,780)
           $ 50,976,892  
                 
Fixed Income - 3.5%
  
Principal Amount
          
Upstream - 3.5%
                
United States - 3.5%
                
BreitBurn Energy Partners, L.P., 7.875%, due 04/15/2022
     1,000,000     $ 795,000  
EV Energy Partners, L.P., 8.000%, due 04/15/2019
     2,000,000       1,898,800  
Total Fixed Income (Cost $3,095,000)
           $ 2,693,800  
                 
Short-Term Investments - Investment Companies - 2.8%
  
Shares
          
United States - 2.8%
                
AIM Short-Term Treasury Portfolio Fund - Institutional Class, 0.01%(2)
     425,620     $ 425,620  
Fidelity Government Portfolio Fund - Institutional Class, 0.01%(2)
     425,620       425,620  
Fidelity Money Market Portfolio - Institutional Class, 0.07%(2)
     425,619       425,619  
First American Government Obligations Fund - Class Z, 0.01%(2)
     425,620       425,620  
Invesco STIC Prime Portfolio, 0.04%(2)
     425,620       425,620  
Total Short-Term Investments - Investment Companies (Cost $2,128,099)
           $ 2,128,099  
                 
Total Investments - 99.0% (Cost $92,506,005)
           $ 76,184,357  
Other Assets in Excess of Liabilities - 1.0%
             793,462  
Net Assets Applicable to Common Stockholders - 100.0%
           $ 76,977,819  
   
 
Percentages are stated as a percent of net assets.
  (1)
All or a portion of these securities are held as collateral pursuant to the loan agreements.
  (2)
Rate reported is the current yield as of February 28, 2015.
 
 
 
 
 
 
Tax Basis

The cost basis of investments for federal income tax purposes at February 28, 2015 was as follows*:
 
Cost of investments
   $ 92,464,148  
Gross unrealized appreciation
     3,122,510  
Gross unrealized depreciation
  
­­­­ (19,402,301)
  
Net unrealized appreciation
   $ (16,279,791 )
 
* The above table only reflects tax adjustments through November 30, 2014.  For the previous fiscal year's federal income tax information, please refer to the Notes to Financial Statements section in the Fund's most recent semi-annual or annual report.

 
Fair Value Measurements
 
Various inputs that are used in determining the fair value of the Cushing Royalty & Income Fund’s (the “Fund”) investments are summarized in the three broad levels listed below:
 
·
Level 1 — quoted prices in active markets for identical securities
·
Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
·
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

 
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
These inputs are summarized in the three broad levels listed below.
 
      Fair Value Measurements at Reporting Date Using        
         
Quoted Prices in
          
Significant
  
         
Active Markets for
    
Significant Other
    
Unobservable
  
   
Fair Value at
    
Identical Assets
    
Observable Inputs
    
Inputs
  
Description
  
February 28, 2015
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Assets
Equity Securities
                        
Common Stock (a)
   $ 20,385,566     $ 20,385,566     $ -     $ -  
Master Limited
    Partnerships and
    Related
    Companies (a)
     50,976,892       50,976,892       -       -  
US Royalty Trusts (a)
     -       -       -       -  
Total Equity Securities
     71,362,458       71,362,458       -       -  
Notes
        Senior Notes(a)
     2,693,800       -       2,693,800       -  
 
 
 
 
 
                                 
Total Notes
     2,693,800       -       2,693,800       -  
Other
                                
Short-Term
       Investments
     2,128,099       2,128,099       -       -  
Total Other
     2,128,099       2,128,099       -       -  
Total
   $ 76,184,357     $ 73,490,557     $ 2,693,800     $ -  


(a)  
All other industry classifications are identified in the Schedule of Investments.  The Fund did not hold Level 3 investments at any time during the period ended February 28, 2015.

Transfers into and out of each level are measured at fair value at the end of the fiscal period.  There were no transfers between any levels during the period ended February 28, 2015.

Derivative Financial Instruments

The Fund provides disclosure regarding derivatives and hedging activity to allow investors to understand how and why the Fund uses derivatives, how derivatives are accounted for, and how derivative instruments affect the Fund’s results of operations and financial position.

The Fund occasionally purchases and sells (“writes”) put and call equity options as a source of potential protection against a broad market decline. A purchaser of a put option has the right, but not the obligation, to sell the underlying instrument at an agreed upon price (“strike price”) to the option seller. A purchaser of a call option has the right, but not the obligation, to purchase the underlying instrument at the strike price from the option seller. Options are settled for cash.

Purchased Options — Premiums paid by the Fund for purchased options are included in the Statement of Assets and Liabilities as an investment. The option is adjusted daily to reflect the fair value of the option and any change in fair value is recorded as unrealized appreciation or depreciation of investments. If the option is allowed to expire, the Fund will lose the entire premium paid and record a realized loss for the premium amount. Premiums paid for purchased options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying investment transaction to determine the realized gain/loss or cost basis of the security.

Written Options — Premiums received by the Fund for written options are included in the Statement of Assets and Liabilities. The amount of the liability is adjusted daily to reflect the fair value of the written option and any change in fair value is recorded as unrealized appreciation or depreciation of investments. Premiums received from written options that expire are treated as realized gains. The Fund records a realized gain or loss on written options based on whether the cost of the closing transaction exceeds the premium received. If a call option is exercised by the option buyer, the premium received by the Fund is added to the proceeds from the sale of the underlying security to the option buyer and compared to the cost of the closing transaction to determine whether there has been a realized gain or loss. If a put option is exercised by an option buyer, the premium received by the option seller reduces the cost basis of the purchased security.

Written uncovered call options subject the Fund to unlimited risk of loss. Written covered call options limit the upside potential of a security above the strike price. Put options written subject the Fund to risk of loss if the value of the security declines below the exercise price minus the put premium.
 
 
 
 
 

The Fund is not subject to credit risk on written options as the counterparty has already performed its obligation by paying the premium at the inception of the contract.

The Fund has adopted the disclosure provisions of FASB Accounting Standard Codification 815, Derivatives and Hedging (“ASC 815”).  ASC 815 requires enhanced disclosures about the Fund’s use of and accounting for derivative instruments and the effect of derivative instruments on the Fund’s results of operations and financial position.  Tabular disclosure regarding derivative fair value and gain/loss by contract type (e.g., interest rate contracts, foreign exchange contracts, credit contracts, etc.) is required and derivatives accounted for as hedging instruments under ASC 815 must be disclosed separately from those that do not qualify for hedge accounting.  Even though the Fund may use derivatives in an attempt to achieve an economic hedge, the Fund’s derivatives are not accounted for as hedging instruments under ASC 815 because investment companies account for their derivatives at fair value and record any changes in fair value in current period earnings.

Transactions in purchased options contracts for the period ended February 28, 2015, are as follows:
 
 
Contracts
    
Premiums
Outstanding at November 30, 2014
6,800
   $
     176,060
Options purchased
-
    
-
Options covered
-
    
-
Options expired
(6,800)
    
(176,060)
Options exercised
-
    
-
Outstanding at February 28, 2015
-
   $
                 -

The average monthly fair value of purchased options during the period ended February 28, 2015 was $1,833.

Transactions in written options contracts for the period ended February 28, 2015, are as follows:
 
 
Contracts
    
Premiums
Outstanding at November 30, 2014
6,800
   $
     449,440
Options written
3,100
    
135,778
Options covered
-
    
-
Options exercised
(6,800)
    
(449,440)
Options expired
(3,100)
    
(135,778)
Outstanding at February 28, 2015
-
   $
                 -

The average monthly fair value of written options during the period ended February 28, 2015 was $1,318,500.


The effect of derivative instruments on the Statement of Operations for the period ended February 28, 2015:
 
 
 
 
 
Amount of Realized Gain (Loss) on Derivatives Recognized in Income
Derivatives not accounted for as
hedging instruments under ASC 815
  
Purchased
Options
Written
Options
Total
Equity Contracts
  
$   (176,060)
$   135,779
$        (40,281)
           
Amount of Unrealized Appreciation (Depreciation) on Derivatives Recognized in Income
Derivatives not accounted for as
hedging instruments under ASC 815
  
Purchased
Options
Written
Options
Total
Equity Contracts
  
$                -
$                 -
$                   -


 
 
 
 
Item 2. Controls and Procedures.
 
(a)  
The Registrant’s President and Treasurer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “1940 Act”)) (17 CFR 270.30a-3(c)) are effective as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rule 13a-15(b) or Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(d)).

(b)  
There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) (17 CFR 270.30a-3(d)) that occurred during the Registrant's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.

 
Item 3. Exhibits.
 
Separate certifications for each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2(a) under the 1940 Act (17 CFR 270.30a-2(a)).  Filed herewith.
 

 
 
 
 
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.


(Registrant)                  The Cushing Royalty & Income Fund                  

 
By (Signature and Title)          /s/ Daniel L. Spears                                    
Daniel L. Spears, President
 
Date              April 23, 2015                                                                            



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 (Signature and Title)           /s/ Daniel L. Spears                                  
Daniel L. Spears, President
 

Date             April 23, 2015                                                                             
 

 
By (Signature and Title)          /s/ John H. Alban                                       
John H. Alban, Treasurer
 
Date             April 23, 2015