UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-02736
---------------------------------------------
PETROLEUM & RESOURCES CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
7 Saint Paul Street, Suite 1140, Baltimore, Maryland 21202
--------------------------------------------------------------------------------
(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, 2004
Date of reporting period: June 30, 2004
[GRAPHIC APPEARS HERE]
PETROLEUM & RESOURCES CORPORATION
--------------------------------------------------------------------------------
Board of Directors
Enrique R. Arzac /1/,/2/ W. Perry Neff /2/,/4/
Phyllis O. Bonanno /1/,/3/ Douglas G. Ober /1/
Daniel E. Emerson /1/,/3/ Landon Peters /2/,/3/
Thomas H. Lenagh /1/,/4/ John J. Roberts /1/
W.D. MacCallan /3/,/4/ Susan C. Schwab /2/,/4/
Kathleen T. McGahran /2/,/4/ Robert J.M. Wilson /1/,/3/
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--Research
Christine M. Sloan Assistant Treasurer
Geraldine H. Pare Assistant Secretary
----------
Stock Data
----------
Market Price (6/30/04) $ 23.81
Net Asset Value (6/30/04) $ 26.22
Discount: 9.2%
New York Stock Exchange and Pacific Exchange ticker symbol: PEO
NASDAQ Mutual Fund Quotation Symbol: XPEOX
Newspaper stock listings are generally under the abbreviation: PetRs
---------------------
Distributions in 2004
---------------------
From Investment Income (paid or declared) $ 0.30
From Net Realized Gains 0.09
---------
Total $ 0.39
=========
---------------------------
2004 Dividend Payment Dates
---------------------------
March 1, 2004
June 1, 2004
September 1, 2004
December 27, 2004*
* Anticipated
LETTER TO STOCKHOLDERS
--------------------------------------------------------------------------------
We submit herewith the audited financial statements of the Corporation for the
six months ended June 30, 2004. In addition, there is a report of the
independent registered public accounting firm, and a schedule of investments,
along with other financial information.
Net assets of the Corporation at June 30, 2004 were $26.22 per share on
21,682,327 shares outstanding, compared with $24.06 per share at December 31,
2003 on 21,736,777 shares outstanding. On March 1, 2004, a distribution of $0.13
per share was paid, consisting of $0.07 from 2003 long-term capital gain, $0.02
from 2003 short-term capital gain, $0.03 from 2003 investment income and $0.01
from 2004 investment income, all taxable in 2004. A 2004 investment income
dividend of $0.13 per share was paid on June 1, 2004 and another $0.13
investment income dividend has been declared to shareholders of record August
17, 2004, payable on September 1, 2004.
Net investment income for the six months ended June 30, 2004 amounted to
$4,645,489, compared with $3,942,668 for the same period in 2003. These earnings
are equal to $0.21 and $0.18 per share on the average number of shares
outstanding during each period.
Net capital gain realized on investments for the six months ended June 30, 2004
amounted to $7,452,675, the equivalent of $0.34 per share.
Current and potential shareholders can find information about the Corporation,
including the daily net asset value (NAV) per share, the market price, and the
discount/premium to the NAV, at its site on the Internet. The address for the
website is www.peteres.com. Also available at the website are a brief history of
the Corporation, historical financial information, and more general industry
material. Further information regarding shareholder services is located on page
14 of this report.
The Corporation is an internally-managed equity fund emphasizing petroleum and
other natural resource investments. The investment policy of the Corporation is
based on the primary objectives of preservation of capital, the attainment of
reasonable income from investments, and an opportunity for capital appreciation.
By order of the Board of Directors,
/s/ Douglas G. Ober
Douglas G. Ober,
Chairman, President and
Chief Executive Officer
July 23, 2004
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
June 30, 2004
Assets
Investments* at value:
Common stocks and convertible securities
(cost $279,204,690) $ 504,988,223
Short-term investments (cost $62,369,605) 62,369,605
Securities lending collateral (cost $38,883,142 38,883,142 $ 606,240,970
-------------------------------------------------------------------------
Cash 349,511
Receivables:
Investment securities sold 2,028,244
Dividends and interest 502,505
Prepaid expenses and other assets 1,594,418
------------------------------------------------------------------------------------------
Total Assets 610,715,648
------------------------------------------------------------------------------------------
Liabilities
Investment securities purchased 126,241
Open written option contracts at value
(proceeds $403,747) 718,740
Obligations to return securities lending collateral 38,883,142
Accrued expenses 2,479,421
------------------------------------------------------------------------------------------
Total Liabilities 42,207,544
------------------------------------------------------------------------------------------
Net Assets $ 568,508,104
==========================================================================================
Net Assets
Common Stock at par value $1.00 per share,
authorized 50,000,000 shares; issued and
outstanding 21,682,327 shares $ 21,682,327
Additional capital surplus 311,592,198
Undistributed net investment income 2,450,993
Undistributed net realized gain on investments 7,314,046
Unrealized appreciation on investments 225,468,540
------------------------------------------------------------------------------------------
Net Assets Applicable to Common Stock $ 568,508,104
==========================================================================================
Net Asset Value Per Share of Common Stock $ 26.22
==========================================================================================
* See Schedule of Investments on pages 8 and 9.
The accompanying notes are an integral part of the financial statements.
2
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
Six Months Ended June 30, 2004
Investment Income
Income:
Dividends $ 5,687,944
Interest and other income 313,352
-----------------------------------------------------------------------------------------
Total income 6,001,296
-----------------------------------------------------------------------------------------
Expenses:
Investment research 401,917
Administration and operations 290,809
Directors' fees 153,375
Reports and stockholder communications 121,899
Transfer agent, registrar and custodian expenses 78,419
Auditing and accounting services 37,281
Legal services 47,793
Occupancy and other office expenses 94,143
Travel, telephone and postage 27,101
Other 103,070
-----------------------------------------------------------------------------------------
Total expenses 1,355,807
-----------------------------------------------------------------------------------------
Net Investment Income 4,645,489
-----------------------------------------------------------------------------------------
Realized Gain and Change in Unrealized Appreciation
on Investments
Net realized gain on security transactions 7,452,675
Change in unrealized appreciation on investments 40,395,990
-----------------------------------------------------------------------------------------
Net Gain on Investments 47,848,665
-----------------------------------------------------------------------------------------
Change in Net Assets Resulting from Operations $ 52,494,154
=========================================================================================
The accompanying notes are an integral part of the financial statements.
3
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 2004 December 31, 2003
---------------- -----------------
From Operations:
Net investment income $ 4,645,489 $ 8,134,186
Net realized gain on investments 7,452,675 17,219,079
Change in unrealized appreciation on investments 40,395,990 66,291,943
------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 52,494,154 91,645,208
------------------------------------------------------------------------------------------------
Distributions to Stockholders from:
Net investment income (3,695,248) (8,108,325)
Net realized gain from investment transactions (1,956,308) (17,260,893)
------------------------------------------------------------------------------------------------
Decrease in net assets from distributions (5,651,556) (25,369,218)
------------------------------------------------------------------------------------------------
From Capital Share Transactions:
Value of shares issued in payment of distributions -- 9,783,141
Cost of shares purchased (Note 4) (1,275,773) (4,393,315)
------------------------------------------------------------------------------------------------
Change in net assets from capital share transactions (1,275,773) 5,389,826
------------------------------------------------------------------------------------------------
Total Increase in Net Assets 45,566,825 71,665,816
Net Assets:
Beginning of period 522,941,279 451,275,463
------------------------------------------------------------------------------------------------
End of period (including undistributed net investment $ 568,508,104 $ 522,941,279
income of $2,450,993 and $1,500,752, respectively)
================================================================================================
The accompanying notes are an integral part of the financial statements.
4
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Petroleum & Resources Corporation (the Corporation) is registered under the
Investment Company Act of 1940 as a non-diversified investment company. The
Corporation's investment objectives as well as the nature and risk of its
investment transactions are set forth in the Corporation's registration
statement.
Security Valuation--Investments in securities traded on national security
exchanges are valued at the last reported sale price on the day of valuation.
Over-the-counter and listed securities for which a sale price is not available
are valued at the last quoted bid price. Short-term investments (excluding
purchased options) are valued at amortized cost. Purchased and written options
are valued at the last quoted asked price.
Security Transactions and Investment Income--Investment transactions are
accounted for on the trade date. Gain or loss on sales of securities and options
is determined on the basis of identified cost. Dividend income and distributions
to shareholders are recognized on the ex-dividend date, and interest income is
recognized on the accrual basis.
2. FEDERAL INCOME TAXES
The Corporation's policy is to distribute all of its taxable income to its
shareholders in compliance with the requirements of the Internal Revenue Code
applicable to regulated investment companies. Therefore, no federal income tax
provision is required. For federal income tax purposes, the identified cost of
securities, including options, at June 30, 2004 was $381,146,354, and net
unrealized appreciation aggregated $225,498,363, of which the related gross
unrealized appreciation and depreciation were $238,194,052 and $12,695,689,
respectively.
Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Accordingly, annual
reclassifications are made within the Corporation's capital accounts to reflect
income and gains available for distribution under income tax regulations.
3. INVESTMENT TRANSACTIONS
The Corporation's investment decisions are made by a committee, and
recommendations to that committee are made by the research staff.
Purchases and sales of portfolio securities, other than options and short-term
investments, during the six months ended June 30, 2004 were $31,652,370 and
$34,228,421, respectively. Options may be written (sold) or purchased by the
Corporation. The Corporation, as writer of an option, bears the risk of possible
illiquidity of the option markets and from movements in security values. The
risk associated with purchasing an option is limited to the premium originally
paid. A schedule of outstanding option contracts as of June 30, 2004 can be
found on page 10.
Transactions in written covered call and collateralized put options during the
six months ended June 30, 2004 were as follows:
Covered Calls Collateralized Puts
-------------------- --------------------
Contracts Premiums Contracts Premiums
--------- --------- --------- ---------
Options outstanding,
December 31, 2003 550 $ 62,932 350 $ 36,992
Options written 2,765 354,677 1,822 217,628
Options terminated in
closing purchase
transactions (300) (31,949)
Options expired (540) (66,210) (700) (72,398)
Options exercised (675) (81,932) (150) (15,993)
----------------------------------------------------------------------------
Options outstanding,
June 30, 2004 1,800 $ 237,518 1,322 $ 166,229
============================================================================
4. CAPITAL STOCK
The Corporation has 5,000,000 authorized and unissued preferred shares without
par value.
On December 27, 2003, the Corporation issued 450,110 shares of its Common Stock
at a price of $21.735 per share (the average market price on December 8, 2003)
to stockholders of record on November 24, 2003 who elected to take stock in
payment of the distribution from 2003 capital gain and investment income.
The Corporation may purchase shares of its Common Stock from time to time at
such prices and amounts as the Board of Directors may deem advisable.
Transactions in Common Stock for 2004 and 2003 were as follows:
Shares Amount
------------------------- --------------------------
Six months Six months
ended Year ended ended Year ended
June 30, December 31, June 30, December 31,
2004 2003 2004 2003
----------- ------------ ------------ ------------
Shares issued in
payment of dividends -- 450,110 $ -- $ 9,783,141
Shares purchased
(at a weighted average
discount from net asset
value of 8.1% and 8.2%,
respectively) (54,450) (223,400) (1,275,773) (4,393,315)
-------------------------------------------------------------------------------
Net change (54,450) 226,710 $ (1,275,773) $ 5,389,826
===============================================================================
On June 30, 2004, the Corporation held a total of 54,450 shares of its Common
Stock at a cost of $1,275,773. There were no shares held by the Corporation at
December 31, 2003.
5
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The Corporation has an employee incentive stock option and stock appreciation
rights plan which provides for the issuance of options and stock appreciation
rights for the purchase of up to 895,522 shares of the Corporation's Common
Stock at 100% of the fair market value at date of grant. Options are exercisable
beginning not less than one year after the date of grant and extend and vest
over ten years from the date of grant. Stock appreciation rights are exercisable
beginning not less than two years after the date of grant and extend over the
period during which the option is exercisable. 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
price and the fair market value of the Common Stock at the date of surrender.
Under the plan, the exercise price of the options and related stock appreciation
rights is reduced by the per share amount of capital gain paid by the
Corporation during subsequent years. At the beginning of 2004, there were
129,447 options outstanding at a weighted average exercise price of $18.35 per
share. During the six months ended June 30, 2004, the Corporation granted
options including stock appreciation rights for 19,241 shares of Common Stock
with an original weighted average exercise price of $22.86. During the six
months ended June 30, 2004, stock appreciation rights relating to 9,941 stock
option shares were exercised at a weighted average market price of $23.99 per
share and the stock options relating to these rights with a weighted average
exercise price of $13.06 per share were cancelled. At June 30, 2004, there were
outstanding exercisable options to purchase 52,264 common shares at
$10.83-$24.44 per share (weighted average price of $17.95) and unexercisable
options to purchase 86,483 common shares at $15.05-$24.44 per share (weighted
average price of $19.87). The weighted average remaining contractual life of
outstanding exercisable and unexercisable options was 5.25 years and 6.68 years,
respectively. The total compensation expense for stock options and stock
appreciation rights recognized for the six months ended June 30, 2004 was
$118,744. At June 30, 2004, there were 260,373 shares available for future
option grants.
5. RETIREMENT PLANS
The Corporation's non-contributory qualified defined benefit pension plan covers
all full-time employees with at least one year of service. Benefits are based on
length of service and compensation during the last five years of employment. The
Corporation's policy is to contribute annually to the plan those amounts that
can be deducted for federal income tax purposes, plus additional amounts as the
Corporation deems appropriate in order to provide assets sufficient to meet
benefits to be paid to plan participants. During the six months ended June 30,
2004, the Corporation contributed $590,000 to the plan. The Corporation does not
anticipate making additional contributions to the plan in 2004.
In addition, the Corporation has a nonqualified defined benefit plan which
provides eligible employees with retirement benefits to supplement the qualified
plan.
The following table aggregates the components of the plans' net periodic pension
cost for the six months ended June 30:
June 30, 2004
-------------
Service Cost $ 68,540
Interest Cost 122,711
Expected return on plan assets (108,398)
Amortization of prior service cost 28,926
Amortization of net loss 66,365
-------------------------------------------------------------------------------
Net periodic pension cost $ 178,144
===============================================================================
The Corporation also sponsors a defined contribution plan that covers
substantially all employees. For the six months ended June 30, 2004, the
Corporation expensed contributions of $26,491. The Corporation does not provide
postretirement medical benefits.
6. EXPENSES
The cumulative amount of accrued expenses at June 30, 2004 for employees and
former employees of the Corporation was $1,176,367. Aggregate remuneration paid
or accrued during the six months ended June 30, 2004 to directors and key
employees amounted to $607,413.
7. PORTFOLIO SECURITIES LOANED
The Corporation makes loans of securities to brokers, secured by cash deposits,
U.S. Government securities, or bank letters of credit. The Corporation accounts
for securities lending transactions as secured financing and receives
compensation in the form of fees or retains a portion of interest on the
investment of any cash received as collateral. The Corporation also continues to
receive interest or dividends on the securities loaned. The loans are secured at
all times by collateral of approximately 102% of the fair value of the
securities loaned plus accrued interest. Gain or loss in the fair value of
securities loaned that may occur during the term of the loan will be for the
account of the Corporation. At June 30, 2004, the Corporation had securities on
loan of $38,176,460 and held collateral of $38,883,142, consisting of repurchase
agreements and commercial paper.
6
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Six Months Ended
------------------------ Year Ended December 31
June 30, June 30, ------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- --------- --------- --------- --------- --------- ----------
Per Share Operating Performance*
Net asset value, beginning of period $ 24.06 $ 20.98 $ 20.98 $ 24.90 $ 32.69 $ 26.32 $ 22.87
-----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.21 0.18 0.38 0.42 0.49 0.37 0.48
Net realized gains and change in
unrealized appreciation 2.20 1.44 3.89 (3.20) (6.81) 7.67 4.67
-----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.41 1.62 4.27 (2.78) (6.32) 8.04 5.15
-----------------------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.17) (0.17) (0.38) (0.43) (0.43) (0.39) (0.48)
Distributions from net realized gains (0.09) (0.09) (0.81) (0.68) (1.07) (1.35) (1.07)
-----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.26) (1.19) (1.11) (1.50) (1.74) (1.55)
-----------------------------------------------------------------------------------------------------------------------------------
Capital share repurchases 0.01 0.02 0.02 0.01 0.06 0.28 0.01
Reinvestment of distributions -- -- (0.02) (0.04) (0.03) (0.21) (0.16)
-----------------------------------------------------------------------------------------------------------------------------------
Total capital share transactions 0.01 0.02 0.00 (0.03) 0.03 0.07 (0.15)
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 26.22 $ 22.36 $ 24.06 $ 20.98 $ 24.90 $ 32.69 $ 26.32
===================================================================================================================================
Per share market price, end of period $ 23.81 $ 20.60 $ 23.74 $ 19.18 $ 23.46 $ 27.31 $ 21.50
Total Investment Return
Based on market price 1.4% 8.8% 30.8% (13.7)% (8.7)% 36.1% 13.3%
Based on net asset value 10.2% 7.9% 21.2% (11.1)% (19.0)% 33.1% 23.8%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 568,508 $ 476,545 $ 522,941 $ 451,275 $ 526,492 $ 688,173 $ 565,075
Ratio of expenses to average net
assets 0.50%+ 0.84%+ 0.74% 0.49% 0.35% 0.59% 0.43%
Ratio of net investment income to
average net assets 1.73%+ 1.74%+ 1.75% 1.84% 1.67% 1.24% 1.86%
Portfolio turnover 13.31%+ 4.68%+ 10.20% 9.69% 6.74% 7.68% 11.89%
Number of shares outstanding at
end of period (in 000's)* 21,682 21,313 21,737 21,510 21,148 21,054 21,471
--------
*Prior years have been adjusted to reflect the 3-for-2 stock split effected in
October 2000. Certain prior year amounts have been reclassified to conform to
current year presentation.
+Ratios presented on an annualized basis.
7
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
June 30, 2004
Prin. Amt.
or Shares Value (A)
------------ ------------
Stocks And Convertible Securities -- 88.8%
Energy -- 74.2%
Internationals -- 25.4%
BP plc ADR 600,000 $ 32,142,000
ChevronTexaco Corp. 270,000 25,409,700
Exxon Mobil Corp. 1,050,000 46,630,500
Royal Dutch Petroleum Co. ADR 400,000 20,668,000
"Shell" Transport and Trading Co.,
plc ADR (B) 135,000 6,034,500
Total S.A. ADR (B) 140,000 13,451,200
------------
144,335,900
------------
Domestics -- 8.9%
Amerada Hess Corp. (B) 125,000 9,898,750
ConocoPhillips 300,000 22,887,000
Kerr McGee Corp. (B) 177,153 9,525,517
Murphy Oil Corp. 65,000 4,790,500
Unocal Capital Trust $3.125 Conv. Pfd. 72,540 3,776,614
------------
50,878,381
------------
Producers -- 13.8%
Apache Corp. 190,000 8,274,500
Burlington Resources Inc. 266,800 9,652,824
Devon Energy Corp. 198,720 13,115,520
EOG Resources, Inc. 200,000 11,942,000
Noble Energy, Inc. 141,000 7,191,000
Occidental Petroleum Corp. 200,000 9,682,000
Pioneer Natural
Resources Co. (B)(C) 316,000 11,085,280
XTO Energy Inc. 250,000 7,447,500
------------
78,390,624
------------
Distributors -- 13.7%
AGL Resources Inc. 250,000 7,262,500
Duke Energy Corp. 217,624 4,415,591
Energen Corp. 200,000 9,598,000
Equitable Resources Inc. 250,000 12,927,500
Keyspan Corp. 220,000 8,074,000
MDU Resources Group, Inc. 300,000 7,209,000
National Fuel Gas Co. 200,000 5,000,000
New Jersey Resources Corp. 277,500 11,538,450
Questar Corp. 200,000 7,728,000
Williams Companies, Inc. 9.0%
FELINE PACS due 2005 120,000 1,653,600
Williams Companies, Inc. 200,000 2,380,000
------------
77,786,641
------------
Services -- 12.4%
Baker Hughes, Inc. 130,000 4,894,500
BJ Services Co. (C) 370,000 16,960,800
GlobalSantaFe Corp. 200,000 5,300,000
Grant Prideco Inc. (B)(C) 308,000 5,685,680
Nabors Industries Ltd. (C) 125,000 5,652,500
Noble Corp. (C) 135,000 5,115,150
Schlumberger Ltd. 280,000 $ 17,782,800
Weatherford International,
Ltd. (B)(C) 205,000 9,220,900
------------
70,612,330
------------
Basic Industries -- 14.6%
Basic Materials & Other -- 10.5%
Air Products and Chemicals, Inc. 125,000 6,556,250
Albemarle Corp. 48,450 1,533,443
Aqua America, Inc. 322,500 6,466,125
Arch Coal Inc. (B) 250,000 9,147,500
du Pont (E.I.) de Nemours and Co. 175,000 7,773,500
General Electric Co. 454,800 14,735,520
Ingersoll-Rand Co. Ltd. 76,400 5,218,882
Rohm & Haas Co. 200,000 8,316,000
------------
59,747,220
------------
Paper and Forest Products -- 4.1%
Boise Cascade Corp. 7.5% ACES due 2004 51,000 2.690,250
Boise Cascade Corp. 205,000 7,716,200
Smurfit-Stone Container Corp. (C) 278,668 5,559,427
Temple-Inland Inc. 105,000 7,271,250
------------
23,237,127
------------
Total Stocks And Convertible Securities
(Cost $279,204,690) (D) 504,988,223
------------
Short-Term Investments -- 11.0%
U.S. Government Obligations -- 1.8%
U.S. Treasury Bills,
0.96%, due 8/19/04 $ 10,000,000 9,986,933
------------
Certificates of Deposit -- 1.0%
Mercantile-Safe Deposit &
Trust Co., 0.90%,
due 9/7/04 $ 5,550,000 5,550,000
------------
Commercial Paper -- 8.2%
American General Finance Corp., 1.05-1.16%,
due 7/13/04-7/22/04 $ 7,000,000 6,996,840
ChevronTexaco Funding Corp., 1.01-1.23%,
due 7/6/04-8/5/04 $ 6,850,000 6,845,524
Coca-Cola Corp., 1.25%,
due 8/3/04 $ 745,000 744,146
Coca-Cola Enterprises Inc., 1.18%,
due 7/29/04 $ 3,300,000 3,296,971
General Electric Capital Corp.,
1.13 - 1.23%,
due 7/15/04 - 8/3/04 $ 4,445,000 4,441,278
8
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
June 30, 2004
Prin. Amt. Value (A)
------------ ------------
General Electric Capital Services Corp.,
1.22 -1.26%,
due 7/29/04 - 8/5/04 $ 2,400,000 $ 2,397,564
GMAC New Center Asset Trust, 1.08%,
due 7/8/04 5,450,000 5,448,856
Pfizer Inc., 1.07%,
due 7/27/04 5,325,000 5,320,885
Proctor & Gamble Co., 1.24%,
due 8/5/04 4,750,000 4,744,274
Toyota Motor Credit Corp., 1.03 - 1.18%,
due 7/15/04 - 7/20/04 6,600,000 6,596,334
-------------
46,832,672
-------------
Total Short-Term Investments
(Cost $62,369,605) $ 62,369,605
-------------
Value (A)
-------------
Securities Lending Collateral -- 6.8%
Repurchase Agreements
Daiwa Securities America Inc., 1.65%,
due 7/1/04 $ 6,385,709
Commercial Paper
Citi Corp., 1.38%,
due 8/3/04 1,498,044
Giro Balanced Funding Corp., 1.29%,
due 7/15/04 999,389
-------------
Total Securities Lending Collateral
(Cost $38,883,142) 38,883,142
-------------
Total Investments -- 106.6%
(Cost $380,457,437) 606,240,970
Cash, receivables and other assets,
less liabilities -- (6.6)% (37,732,866)
-------------
Net Assets -- 100.0% $ 568,508,104
=============
================================================================================
Notes:
(A) See note 1 to financial statements. Securities are listed on the New York
Stock Exchange, the American Stock Exchange, or the NASDAQ.
(B) Some or all of these securities are on loan. See note 7 to financial
statements.
(C) Presently non-dividend paying.
(D) The aggregate market value of stocks held in escrow at June 30,
2004 covering open call option contracts written was $11,644,950. In
addition, the aggregate market value of securities segregated by the
Corporation's custodian required to collateralize open put option
contracts written was $5,372,500.
9
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
--------------------------------------------------------------------------------
June 30, 2004
Contracts Contract
(100 shares Strike Expiration Appreciation/
each) Security Price Date (Depreciation)
----------- -------- ------ --------- -------------
COVERED CALLS
150 Amerada Hess Corp. ................. $ 65 Aug 04 $ (201,676)
250 Boise Cascade Corp. ................ 40 Aug 04 (8,251)
250 Boise Cascade Corp. ................ 40 Nov 04 (22,001)
200 ConocoPhillips ..................... 80 Aug 04 7,199
200 EOG Resources, Inc. ................ 50 Jul 04 (165,602)
100 Ingersoll-Rand Co. Ltd. ............ 70 Jul 04 1,200
250 Temple-Inland Inc. ................. 70 Aug 04 (22,001)
150 Temple-Inland Inc. ................. 70 Nov 04 (19,951)
150 Total S.A. ......................... 100 Aug 04 (7,850)
100 Total S.A. ......................... 105 Nov 04 2,200
----- ----------
1,800 (436,733)
----- ----------
COLLATERALIZED PUTS
100 BP plc ............................. 45 Jul 04 13,199
200 Baker Hughes, Inc. ................. 30 Oct 04 12,549
150 ConocoPhillips ..................... 65 Aug 04 18,300
150 du Pont (E.I.) de Nemours and Co. .. 37.50 Oct 04 9,300
200 Murphy Oil Corp. ................... 55 July 04 16,849
72 Murphy Oil Corp. ................... 50 Oct 04 3,744
200 Pioneer Natural Resources Co. ...... 30 Sep 04 24,399
100 Schlumberger Ltd. .................. 50 Nov 04 14,100
150 Smurfit-Stone Container Corp. ...... 15 Aug 04 9,300
----- ----------
1,322 121,740
----- ----------
$ (314,993)
==========
10
CHANGES IN PORTFOLIO SECURITIES
--------------------------------------------------------------------------------
During the Three Months Ended June 30, 2004
(unaudited)
Shares
----------------------------------------
Held
Additions Reductions June 30, 2004
--------- ---------- -------------
BP plc ADR 10,000 600,000
Burlington Resources Inc. 133,400(1) 266,800
ConocoPhillips 15,000 300,000
Duke Energy Corp. 102,624(2) 217,624
du Pont (E.I.) de Nemours and Co. 175,000 175,000
Pioneer Natural Resources Co. 20,000 316,000
Smurfit-Stone Container Corp. 80,993 278,668
XTO Energy Inc. 31,100 250,000
Albemarle Corp. 151,550 48,450
Aqua America, Inc. 7,500 322,500
ChevronTexaco Corp. 20,000 270,000
Duke Energy Corp. 8.25% Conv. Pfd, due 2004 160,000(2) --
Ingersoll-Rand Co. Ltd. 1,600 76,400
Kinder Morgan, Inc. 77,300 --
Royal Dutch Petroleum Co. ADR 10,000 400,000
Stone Energy Corp. 104,300 --
TECO Energy, Inc. 200,000 --
----------
(1) By stock split
(2) By conversion.
----------
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 this report.
The rates of return will vary and the market 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.
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of Petroleum & Resources Corporation:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Petroleum & Resources Corporation
(hereafter referred to as the "Corporation") at June 30, 2004, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the fiscal periods presented, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 8, 2004
12
HISTORICAL FINANCIAL STATISTICS
--------------------------------------------------------------------------------
Dividends Distributions
Net from from
Asset Net Investment Net Realized
Value of Shares Value per Income Gains
December 31 Net Assets Outstanding* Share* per Share* per Share*
------------ ------------- ------------ --------- -------------- -------------
1994 $ 332,279,398 18,570,450 $ 17.89 $ .61 $ .79
1995 401,404,971 19,109,075 21.01 .58 .81
1996 484,588,990 19,598,729 24.73 .55 .88
1997 556,452,549 20,134,181 27.64 .51 1.04
1998 474,821,118 20,762,063 22.87 .52 1.01
1999 565,075,001 21,471,270 26.32 .48 1.07
2000 688,172,867 21,053,644 32.69 .39 1.35
2001 526,491,798 21,147,563 24.90 .43 1.07
2002 451,275,463 21,510,067 20.98 .43 .68
2003 522,941,279 21,736,777 24.06 .38 .81
June 30, 2004 568,508,104 21,682,327 26.22 .30+ .09+
----------
* Prior years have been adjusted to reflect the 3-for-2 stock split effected in
October 2000.
+ Paid or declared.
----------
Common Stock
Listed on the New York Stock Exchange
and the Pacific Exchange
Petroleum & Resources Corporation
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(410) 752-5900 or (800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
Counsel: Chadbourne & Parke L.L.P.
Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP
Transfer Agent & Registrar: American Stock Transfer & Trust Co.
Custodian of Securities: The Bank of New York
13
SHAREHOLDER INFORMATION AND SERVICES
--------------------------------------------------------------------------------
DIVIDEND PAYMENT SCHEDULE
The Corporation presently pays dividends four times a year, as follows: (a)
three interim distributions on or about March 1, June 1, and September 1 and (b)
a "year-end" distribution, payable in late December, consisting of the estimated
balance of the net investment income for the year and the net realized capital
gain earned through October 31. Stockholders may elect to receive the year-end
distribution in stock or cash. In connection with this distribution, all
stockholders of record are sent a dividend announcement notice and an election
card in mid-November.
Stockholders holding shares in "street" or brokerage accounts may make their
elections by notifying their brokerage house representative.
INVESTORS CHOICE
INVESTORS CHOICE is a direct stock purchase and sale plan, as well as a dividend
reinvestment plan, sponsored and administered by our transfer agent, American
Stock Transfer & Trust Company (AST). The plan provides registered stockholders
and interested first time investors an affordable alternative for buying,
selling, and reinvesting in Petroleum & Resources shares.
The costs to participants in administrative service fees and brokerage
commissions for each type of transaction are listed below.
Initial Enrollment and Optional Cash Investments
Service Fee $2.50 per investment
Brokerage Commission $0.05 per share
Reinvestment of Dividends**
Service Fee 2% of amount invested
(maximum of $2.50 per investment)
Brokerage Commission $0.05 per share
Sale of Shares
Service Fee $10.00
Brokerage Commission $0.05 per share
Deposit of Certificates for safekeeping $7.50
Book to Book Transfers Included
To transfer shares to another participant or to a new participant
Fees are subject to change at any time.
Minimum and Maximum Cash Investments
Initial minimum investment (non-holders) $500.00
Minimum optional investment (existing holders) $50.00
Electronic Funds Transfer
(monthly minimum) $50.00
Maximum per transaction $25,000.00
Maximum per year NONE
A brochure which further details the benefits and features
of INVESTORS CHOICE as well as an enrollment form may be obtained by contacting
AST.
For Non-Registered Shareholders
For shareholders whose stock is held by a broker in "street" name, the AST
INVESTORS CHOICE Direct Stock Purchase and Sale Plan remains available through
many registered investment security dealers. If your shares are currently held
in a "street" name or brokerage account, please contact your broker for details
about how you can participate in AST's Plan or contact AST.
----------
The Corporation
Petroleum & Resources Corporation
Lawrence L. Hooper, Jr.
Vice President, General Counsel and Secretary
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
The Transfer Agent
American Stock Transfer & Trust Company
Address Shareholder Inquiries to:
Shareholder Relations Department
59 Maiden Lane
New York, NY 10038
(866) 723-8330
Website: www.amstock.com
E-mail: info@amstock.com
Investors Choice Mailing Address:
Attention: Dividend Reinvestment
P.O. Box 922
Wall Street Station
New York, NY 10269
Website: www.InvestPower.com
E-mail: info@InvestPower.com
*The year-end dividend and capital gain distribution will usually be made in
newly issued shares of common stock. There will be no fees or commissions in
connection with this dividend and capital gain distribution when made in newly
issued shares.
14
Item 2: Code(s) of Ethics for senior financial officers - Item not applicable to
semi-annual report.
Item 3: Audit Committee Financial Expert - Item not applicable to semi-annual
report.
Item 4: Principal Accountant Fees and Services - Item not applicable to
semi-annual report.
Item 5: Audit Committee of Listed Registrants - Item not applicable to semi
annual report.
Item 6: Schedule of Investments - This schedule is included as part of the
report to shareholders filed under Item 1 of this form.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Item not applicable to semi-annual
report.
Item 8: 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. 2004 0 -- 0 1,064,333
Feb. 2004 0 -- 0 1,064,333
Mar. 2004 0 -- 0 1,064,333
Apr. 2004 0 -- 0 1,064,333
May 2004 7,900 $ 23.04 7,900 1,056,433
June 2004 46,550 $ 23.50 46,550 1,009,933
-------- --------- --------- --------- ---------
Total 54,450(1) $ 23.43 54,450(2) 1,009,883(2)
(1) There were no shares purchased other than through a publicly announced
plan or program.
(2.a) The Plan was announced on December 11, 2003.
(2.b) The share amount approved was 5% of outstanding shares, or
approximately 4,112,647 shares.
(2.c) The Plan will expire on or about December 9, 2004.
(2.d) None.
(2.e) None.
Item 9: 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 10: Controls and Procedures.
(a) The registrant's Principal Executive Officer and Principal Financial
Officer have evaluated the registrant's disclosure controls and procedures
within 90 days of this filing and have concluded that the registrant's
disclosure controls and procedures were effective, as of that date, in
ensuring that information required to be disclosed by the registrant in
this Form N-CSR was recorded, processed, summarized, and reported timely.
(b) Internal Controls. There were no significant changes in the
registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 11: Exhibits attached hereto. (Attach certifications as exhibits)
(1) Not required at this time.
(2) Separate certifications by the registrant's principal executive officer and
principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2 under the Investment Company Act of 1940, are
attached.
A certification by the registrant's principal executive officer and principal
financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is
attached.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PETROLEUM & RESOURCES CORPORATION
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer
(Principal Executive Officer)
Date: August 2, 2004
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: August 2, 2004
BY: /s/ Maureen A. Jones
-----------------------
Maureen A. Jones
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: August 2, 2004