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, 2005
Date of reporting period: December 31, 2005
Item 1: Reports to Stockholders
2005 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 (12/31/05)
NYSE Symbol.............. PEO
Market Price ......... $32.34
52-Week Range $25.55 - $35.40
Discount ............... 8.2%
Shares Outstanding 21,621,072
SUMMARY FINANCIAL INFORMATION
Year Ended December 31
2005 2004
------------------------------------------------------------------------
Net asset value per share $ 35.24 $ 28.16
Total net assets 761,913,652 618,887,401
Unrealized appreciation 428,811,345 275,422,891
Net investment income 11,391,783 8,924,453
Total realized gain 26,239,852 18,979,327
Total return (based on market value) 32.3% 14.4%
Total return (based on net asset value) 32.0% 23.3%
Expense ratio 0.59% 0.56%
------------------------------------------------------------------------
2005 DIVIDENDS AND DISTRIBUTIONS
Amount
Paid (per share) Type
-----------------------------------------------------
March 1, 2005 $0.06 Long-term capital gain
March 1, 2005 0.02 Short-term capital gain
March 1, 2005 0.05 Investment income
June 1, 2005 0.13 Investment income
September 1, 2005 0.13 Investment income
December 27, 2005 1.00 Long-term capital gain
December 27, 2005 0.14 Short-term capital gain
December 27, 2005 0.25 Investment income
-----------------------------------------------------
$1.78
-----------------------------------------------------
2006 ANNUAL MEETING OF STOCKHOLDERS
Location: Gaylord Palms Hotel Resort & Convention Center, Orlando, Florida
Date: March 28, 2006
Time: 11:00 a.m.
PORTFOLIO REVIEW
--------------------------------------------------------------------------------
TEN LARGEST PORTFOLIO HOLDINGS (12/31/05)
Market Value % of Net Assets
------------------------------------------------------
Exxon Mobil Corp. $ 64,033,800 8.4
BP plc ADR 38,532,000 5.0
Chevron Corp. 36,048,950 4.7
ConocoPhillips 29,671,800 3.9
Schlumberger Ltd. 27,202,000 3.6
BJ Services Co. 27,135,800 3.6
EOG Resources, Inc. 25,312,650 3.3
Devon Energy Corp. 22,201,700 2.9
Burlington Resources Inc. 21,274,160 2.8
Nabors Industries Ltd. 19,695,000 2.6
------------ ----
Total $311,107,860 40.8%
------------ ----
SECTOR WEIGHTINGS (12/31/05)
[CHART]
Internationals 22.4%
Domestics 11.3%
Producers 20.3%
Distributors 12.3%
Services 20.2%
Basic Materials & Other 10.7%
Paper & Forest Products 0.6%
Cash & Equivalent 2.2%
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
--------------------------------------------------------------
1991 $10,311 $ 520 $ 346 $11,177 $12,070
1992 10,014 1,052 648 11,714 12,834
1993 10,906 1,757 1,066 13,729 14,800
1994 10,014 2,219 1,399 13,632 14,494
1995 11,204 3,162 2,035 16,401 18,297
1996 13,786 4,708 3,031 21,525 22,971
1997 14,476 5,888 3,650 24,014 27,281
1998 12,150 5,950 3,546 21,646 24,239
1999 12,793 7,488 4,229 24,510 30,005
2000 16,249 11,248 5,848 33,345 39,914
2001 13,959 11,011 5,481 30,451 32,320
2002 11,412 9,881 4,983 26,276 28,743
2003 14,125 13,468 6,759 34,352 34,815
2004 15,339 15,919 8,031 39,289 42,916
2005 19,242 21,786 10,942 51,970 56,631
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 1991-2005. 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.
[CHART]
Cumulative Cumulative
Market Value Market Value of Market Value of Total Total
of Original Shares from Capital Shares from market net asset
Shares gains distributions income dividends value value
------------ ------------------- ---------------- ------- ---------
91 $10,311 $ 520 $ 346 $11,177 $12,070
92 $10,014 $ 1,052 $ 648 $11,714 $12,834
93 $10,906 $ 1,757 $ 1,066 $13,729 $14,800
94 $10,014 $ 2,219 $ 1,399 $13,632 $14,494
95 $11,204 $ 3,162 $ 2,035 $16,401 $18,297
96 $13,786 $ 4,708 $ 3,031 $21,525 $22,971
97 $14,476 $ 5,888 $ 3,650 $24,014 $27,281
98 $12,150 $ 5,950 $ 3,546 $21,646 $24,239
99 $12,793 $ 7,488 $ 4,229 $24,510 $30,005
00 $16,249 $11,248 $ 5,848 $33,345 $39,914
01 $13,959 $11,011 $ 5,481 $30,451 $32,320
02 $11,412 $ 9,881 $ 4,983 $26,276 $28,743
03 $14,125 $13,468 $ 6,759 $34,352 $34,815
04 $15,339 $15,919 $ 8,031 $39,289 $42,916
05 $19,242 $21,786 $10,942 $51,970 $56,631
2
LETTER TO SHAREHOLDERS
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Over the last several years, the energy sector has posted strong earnings and
share price performance. 2005 marked the fourth consecutive year of energy
stocks outperforming the Dow Jones Industrial Average and the S&P 500 Index. In
this annual report we detail our performance for 2005 and share our current
outlook for the energy markets.
THE YEAR IN REVIEW
The early decline in oil and natural gas prices attributed to warm weather and
high inventories was short lived. Daily news headlines quickly focused on
underinvestment by the industry, supply scarcity and limited new resource
potential. While demand growth, especially in China and the United States,
drove energy prices in 2004, supply concerns and worldwide capacity drove
prices in 2005. In fact, U.S. crude oil and natural gas prices increased an
average of 36% and 45%, respectively, while U.S. energy demand was flat. The
driver of the higher prices was concern about limited spare capacity,
especially within OPEC. The late summer hurricane season greatly compounded the
concerns about resource availability. Besides having a devastating impact on
many lives, Hurricanes Katrina and Rita inflicted substantial damage to both
upstream and downstream U.S. infrastructure, further propelling energy prices
higher. Crude prices spiked to over $69 per barrel and natural gas exceeded $15
per thousand cubic feet (mcf). Gasoline prices increased with strong demand and
topped $3.00 per gallon temporarily as a result of the hurricanes. As Gulf of
Mexico supplies gradually returned to the market, commodity prices retreated to
pre-hurricane levels. At year end, crude oil closed at $61.04 per barrel,
compared to $42.12 at the start of the year, and natural gas closed at $11.23
per mcf versus $5.79 at the start of 2005.
Strong energy prices led to a continued increase in onshore and offshore
drilling activity during 2005. U.S. land rig utilization increased during the
year as the rig count rose 23% to 1,372. The increased activity pushed leading
edge day rates (the daily cost to the operator of renting the drilling rig)
about 50% higher for U.S. land rigs and led to a near doubling of average day
rates for offshore rigs. While oil companies experienced higher costs, drilling
service companies benefited from both higher activity and a significant
increase in pricing throughout their product lines. In addition, drilling
contractors in the Gulf of Mexico benefited from a sharp rise in day rates
following the loss of or significant damage to 10 jackup rigs and 5 drilling
platforms during Hurricanes Katrina and Rita.
The coal market directly benefited from the significant increase in natural gas
prices. Rising natural gas prices led to a continued increase in utilization
rates at U.S. coal-fired power plants. A majority of the higher demand for coal
was satisfied by production out of the western U.S. As a result of the strong
demand and a related increase in environmental compliance costs, the relatively
clean-burning coal from the western U.S. more than doubled in price, while
eastern coal prices were flat. Material and labor costs partially offset the
price improvements.
PERFORMANCE
High earnings and cash flows resulted from robust industry fundamentals and
strong capital discipline. Most companies reduced debt, maintained a strong
financial position, initiated or expanded share repurchase programs and raised
dividends. Petroleum & Resources, as well as the energy indices, significantly
outperformed the S&P 500 Index and the Dow Jones Industrial Average. The total
return on the Fund's net assets, including income and capital gain
distributions for the calendar year, was 32.0%. Comparable figures for the S&P
500 Index and the Dow Jones Industrials were 4.9% and 1.7%, respectively. The
Dow Jones Oil & Gas Index returned 32.0%. On a market value basis, Petroleum &
Resources' total return was 32.3%.
Stock selection and weightings explain the performance variations between
Petroleum & Resources and the indices. The Oil and Gas sector comprises only
9.3% of the S&P 500 and 77.4% of the Petroleum & Resources portfolio. Energy
equities in the S&P 500 advanced 31.3% while Petroleum & Resources' energy
holdings produced a return of 39.7%. The table below summarizes the weightings
and performance of Petroleum & Resources versus the comparable S&P 500 figures.
Select S&P 500 Sectors Compared to PEO - 2005
S&P PEO S&P PEO
Sector Weighting Weighting Return Return
---------------------------------------------
Energy 9.3% 77.4% 31.3% 39.7%
---------------------------------------------
Materials 2.9% 7.9% 4.4% 16.9%
---------------------------------------------
Industrials 11.3% 2.1% 2.2% -1.5%
---------------------------------------------
Utilities 3.3% 12.6% 16.7% 21.0%
---------------------------------------------
Petroleum & Resources is a conservative equity investment in energy and natural
resource companies with a broadly diversified exposure to the energy sector.
Comparison against the Dow Jones Oil & Gas Index
3
LETTER TO SHAREHOLDERS (continued)
--------------------------------------------------------------------------------
(DJOGI) provides an industry-specific measure. Petroleum & Resources' gain on
both a net asset value and market basis of 32% matched that of the DJOGI. This
performance is exceptional when overlaid on our investment objectives of
preservation of capital, generation of reasonable income, and providing the
opportunity for capital gain. These objectives are met by stock selection
across the energy spectrum. Large integrated oil companies, gas distributors,
and utilities provided stability and income while exploration and production as
well as oil service companies contributed greater capital appreciation.
Petroleum & Resources matched the DJOGI while providing diversification and
income. We are diversified in several industries not in the DJOGI, including
coal, chemicals, paper, gas distributors, and water utilities. Additionally, we
invest in foreign energy securities for diversification and income whereas the
DJOGI does not include these equities.
INVESTMENT RESULTS
Net assets of the Corporation on December 31, 2005 were $761,913,652 or $35.24
per share on 21,621,072 shares outstanding. This compares with $618,887,401 or
$28.16 per share on 21,979,676 shares outstanding a year earlier.
Net investment income for 2005 was $11,391,783 compared to $8,924,453 for 2004.
These earnings are equivalent to $0.53 and $0.41 per share, respectively, on
the average number of shares outstanding throughout each year. As a result of
the reorganization of Precision Drilling Corp. into a trust in 2005, the
Corporation received dividend income of $3,032,857 or $0.14 per share. This
accounts in large measure for the increase in investment income over 2004 and
is not expected to recur in 2006. In 2005, our 0.59% expense ratio (expenses to
average net assets) was once again at a low level compared to the industry.
Net realized gains amounted to $26,239,852 during the year, while the
unrealized appreciation on investments increased from $275,422,891 at December
31, 2004 to $428,811,345 at year end, a 56% increase.
DIVIDENDS AND DISTRIBUTIONS
Total dividends and distributions paid in 2005 were $1.78 per share compared to
$1.32 in 2004. As announced on November 10, 2005, a year-end distribution
consisting of investment income of $0.25 and capital gains of $1.14 was made on
December 27, 2005, both realized and taxable in 2005. On January 12, 2006, an
additional distribution of $0.13 per share was declared payable March 1, 2006,
representing undistributed net investment income and capital gains earned in
2005, taxable to shareholders in 2006.
OUTLOOK FOR 2006
The first few days of 2006 served as a reminder that oil and gas are
commodities and their prices are subject to inventory levels and weather.
Natural gas prices peaked at more than $11.00 per mcf then declined 16% due to
warm weather and plentiful supplies. However, even after the correction,
natural gas prices are at record high levels due to declining North American
production compounded by the severe hurricane season. Four months after the
hurricanes, about 26% of Gulf of Mexico oil production and 19% of Gulf of
Mexico gas remain shut in, and the impact will linger into 2006. Therefore, we
expect natural gas prices to remain at historically high levels but to
experience volatility due to weather sensitivity. Gas prices for the year 2006
are expected to average slightly less than the $8.33 per mcf average for 2005,
barring another strong hurricane season.
Likewise, as we move through 2006, the same influences that drove world oil
prices in 2005, such as rapid world oil demand growth, low OPEC and non-OPEC
spare capacity, and refinery constraints, will continue to affect oil markets.
Worldwide energy demand growth is expected to continue, with the strongest
gains being experienced in the Asia-Pacific region and the U.S. While
production capacity growth will remain limited, new supplies both in OPEC and
non-OPEC countries should match demand increases. If demand falls, OPEC appears
willing to adjust quotas to maintain the oil price above $50.00 per barrel.
However, geopolitical issues and weather are unknowns and will disrupt the
apparent balance when they occur. We see tight oil supply-demand fundamentals
persisting throughout the year but do not expect them to worsen. Accordingly,
we are anticipating an oil price average of $50-$60 per barrel.
Earnings for companies in the energy sector will be strong as commodity prices
remain at historically high levels. The rate of gain in earnings will slow as
costs increase and revenues reflect lower prices. Large integrated energy
companies and oil service firms should do well in this environment. Companies
will continue to spend cash flow to generate future production gains, directly
benefiting the oil service stocks. As noted earlier, returns for energy stocks
have exceeded the overall market returns for several years. Since fundamentals
still appear strong, we expect our portfolio to continue to perform well in
2006.
4
LETTER TO SHAREHOLDERS (continued)
--------------------------------------------------------------------------------
SHARE REPURCHASE PROGRAM
On December 8, 2005, 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 2006 through January 25, 2006, 35,150 shares have been
repurchased at a total cost of $1,216,967 and a weighted average discount from
net asset value of 8.1%.
----------
DIRECTOR CHANGES
There have been a number of changes in the composition of the Board of
Directors in the past year, some of which were noted in our quarterly reports.
Mr. W. David MacCallan, Chairman of the Corporation for twenty years before
retiring in 1991, passed away in August. Mr. Landon Peters passed away earlier
in the year and Mr. W. Perry Neff retired. Both had been directors for many
years and their advice and guidance are missed. In October, Dr. Susan Schwab
was nominated to be Deputy U.S. Trade Representative and confirmed in November,
necessitating her resignation from the Board. Though a director for only five
years, Dr. Schwab brought a fresh perspective and broad international
experience to the Board that will be difficult to replace. To address these
departures, the Board of Directors elected two new directors, Dr. Roger W. Gale
and Dr. Craig R. Smith, who joined the Board effective December 1, 2005. Each
has broad experience in corporate governance. In addition, Dr. Gale brings to
the Board specific knowledge of the energy and utility industries. We welcome
them and look forward to their participation in the Board's activities.
----------
The proxy statement for the Annual Meeting of Stockholders to be held in
Orlando, Florida on March 28, 2006, is expected to be mailed on or about
February 17, 2006.
By order of the Board of Directors,
/s/ Douglas G. Ober
Douglas G. Ober,
Chairman, President and
Chief Executive Officer
January 26, 2006
5
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
December 31, 2005
Assets
Investments* at value:
Common stocks and convertible securities
(cost $316,230,755) $745,022,832
Short-term investments (cost $17,168,422) 17,168,422
Securities lending collateral (cost $5,809,478) 5,809,478 $768,000,732
---------------------------------------------------------------------------------------------
Cash 305,614
Receivables:
Investment securities sold 9,700
Dividends 771,762
Prepaid pension cost 1,032,479
Prepaid expenses and other assets 475,986
----------------------------------------------------------------------------------------------------------
Total Assets 770,596,273
----------------------------------------------------------------------------------------------------------
Liabilities
Open written option contracts at value (proceeds $422,668) 403,400
Obligations to return securities lending collateral 5,809,478
Accrued expenses and other liabilities 2,469,743
----------------------------------------------------------------------------------------------------------
Total Liabilities 8,682,621
----------------------------------------------------------------------------------------------------------
Net Assets $761,913,652
----------------------------------------------------------------------------------------------------------
Net Assets
Common Stock at par value $1.00 per share, authorized
50,000,000 shares; issued and outstanding 21,621,072 shares (includes
4,630 restricted shares and restricted stock units for 4,000 shares) (Note 6) $ 21,621,072
Additional capital surplus 309,452,524
Unearned compensation -- restricted stock awards (Note 6) (152,834)
Undistributed net investment income 106,632
Undistributed net realized gain on investments 2,074,913
Unrealized appreciation on investments 428,811,345
----------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Stock $761,913,652
----------------------------------------------------------------------------------------------------------
Net Asset Value Per Share of Common Stock $35.24
----------------------------------------------------------------------------------------------------------
* See schedule of investments on pages 14 through 16.
The accompanying notes are an integral part of the financial statements.
6
Investment Income
Income:
Dividends $ 14,338,074
Interest and other income 1,275,182
-------------------------------------------------------------------------------
Total income 15,613,256
-------------------------------------------------------------------------------
Expenses:
Investment research 1,958,168
Administration and operations 998,311
Directors' fees 309,662
Reports and stockholder communications 230,169
Transfer agent, registrar and custodian expenses 154,527
Auditing and accounting services 88,133
Legal services 84,435
Occupancy and other office expenses 209,850
Travel, telephone and postage 71,955
Other 116,263
-------------------------------------------------------------------------------
Total expenses 4,221,473
-------------------------------------------------------------------------------
Net Investment Income 11,391,783
-------------------------------------------------------------------------------
Realized Gain and Change in Unrealized Appreciation on Investments
Net realized gain on security transactions 26,239,852
Change in unrealized appreciation on investments 153,388,454
-------------------------------------------------------------------------------
Net Gain on Investments 179,628,306
-------------------------------------------------------------------------------
Change in Net Assets Resulting from Operations $191,020,089
-------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
7
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
For the Year Ended
--------------------------
Dec. 31, 2005 Dec. 31, 2004
------------------------------------------------------------------------------------------
From Operations:
Net investment income $ 11,391,783 $ 8,924,453
Net realized gain on investments 26,239,852 18,979,327
Change in unrealized appreciation on investments 153,388,454 90,350,341
------------------------------------------------------------------------------------------
Change in net assets resulting from operations 191,020,089 118,254,121
------------------------------------------------------------------------------------------
Distributions to Stockholders From:
Net investment income (12,030,248) (9,536,803)
Net realized gain from investment transactions (25,924,473) (19,037,472)
------------------------------------------------------------------------------------------
Decrease in net assets from distributions (37,954,721) (28,574,275)
------------------------------------------------------------------------------------------
From Capital Share Transactions:
Value of shares issued in payment of distributions 14,748,314 9,629,174
Cost of shares purchased (note 4) (24,891,727) (3,362,898)
Deferred compensation (notes 4, 6) 104,296 --
------------------------------------------------------------------------------------------
Change in net assets from capital share transactions (10,039,117) 6,266,276
------------------------------------------------------------------------------------------
Total Increase in Net Assets 143,026,251 95,946,122
Net Assets:
Beginning of year 618,887,401 522,941,279
------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $106,632 and $746,047, respectively) $761,913,652 $618,887,401
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
8
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 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, 2005 was $339,178,832, and net unrealized
appreciation aggregated $428,821,900, of which the related gross unrealized
appreciation and depreciation were $432,696,292 and $3,874,392, respectively.
As of December 31, 2005, the tax basis of distributable earnings was $1,156,731
of undistributed ordinary income and $1,402,776 of undistributed long-term
capital gain.
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. In comparison, distributions paid by the Corporation during the
year ended December 31, 2004 were classified as ordinary income of $9,971,538
and capital gain of $18,602,737. 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, 2005 were $68,079,797 and
$72,252,597, 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,
2005 can be found on page 17.
Transactions in written covered call and collateralized put options during the
year ended December 31, 2005 were as follows:
Covered Calls Collateralized Puts
------------------- -------------------
Contracts Premiums Contracts Premiums
--------- --------- --------- ---------
Options outstanding,
December 31, 2004 1,550 $ 204,167 1,470 $ 167,283
Options written 7,570 942,954 4,950 496,306
Options terminated in
closing purchase
transactions (1,350) (187,354) -- --
Options expired (2,500) (261,840) (5,370) (533,698)
Options exercised (3,330) (405,150) -- --
---------------------------------------------------------------
Options outstanding,
December 31, 2005 1,940 $ 292,777 1,050 $ 129,891
---------------------------------------------------------------
4. CAPITAL STOCK
The Corporation has 5,000,000 authorized and unissued preferred shares without
par value.
On December 27, 2004, the Corporation issued 380,149 shares of its Common Stock
at a price of $25.33 per share (the average market price on December 13, 2004)
to stockholders of record November 23, 2004 who elected to take stock in
payment of the distribution from 2004 capital gain and investment income.
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.
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.
9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Transactions in Common Stock for 2005 and 2004 were as follows:
Shares Amount
------------------ -------------------------
2005 2004 2005 2004
-------- -------- ------------ -----------
Shares issued in payment
of distributions 438,416 380,149 $ 14,748,314 $ 9,629,174
Shares purchased
(at an average discount
from net asset value of 8.1%
and 8.0%, respectively) (806,050) (137,250) (24,891,727) (3,362,898)
Restricted shares/units granted
under the equity incentive
compensation plan 9,030 -- 104,296 --
------------------------------------------------------------------------------
Net change (358,604) 242,899 $(10,039,117) $ 6,266,276
------------------------------------------------------------------------------
5. RETIREMENT PLANS
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.
2005 2004
---------- -----------
Change in benefit obligation
Benefit obligation at beginning of year $4,519,368 $ 3,989,256
Service cost 185,168 137,080
Interest cost 281,088 245,422
Actuarial loss 66,553 270,897
Benefits paid (104,925) (123,287)
-----------------------------------------------------------------------
Benefit obligation at end of year $4,947,252 $ 4,519,368
-----------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $3,505,688 $ 2,749,114
Actual return on plan assets 106,795 243,186
Employer contribution 455,520 636,675
Benefits paid (104,925) (123,287)
-----------------------------------------------------------------------
Fair value of plan assets at end of year $3,963,078 $ 3,505,688
-----------------------------------------------------------------------
Funded status $ (984,174) $(1,013,680)
Unrecognized net loss 1,361,416 1,332,884
Unrecognized prior service cost 152,389 178,830
-----------------------------------------------------------------------
Net amount recognized $ 529,631 $ 498,034
-----------------------------------------------------------------------
Amounts recognized in the statement of assets and liabilities consist of:
2005 2004
---------- ---------
Prepaid pension cost $1,032,479 $ 985,707
Accrued pension cost (502,848) (487,673)
--------------------------------------------
Net amount recognized $ 529,631 $ 498,034
--------------------------------------------
The accumulated benefit obligation for all defined benefit pension plans was
$3,491,069 and $3,533,866 at December 31, 2005, and 2004, respectively.
2005 2004
--------- ---------
Components of net periodic pension cost
Service cost $ 185,168 $ 137,080
Interest cost 281,088 245,422
Actual return on plan assets (106,795) (243,186)
Amortization of prior service cost 54,913 57,851
Amortization of net loss 180,246 132,729
Deferred asset gain (173,395) 26,391
-------------------------------------------------------------
Net periodic pension cost $ 421,225 $ 356,287
-------------------------------------------------------------
Assumptions used to determine benefit obligations and
costs are:
2005 2004
----- -----
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%
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, 2005 and 2004, by asset category, are as
follows:
2005 2004
---- ----
Asset Category
Equity Securities & Equity Mutual Funds 70% 71%
Fixed Income Mutual Funds 29% 25%
Cash 1% 4%
Equity securities include shares of The Adams Express Company, the
Corporation's non-controlled affiliate, in the amount of $203,280 (5% of total
plan assets) and $201,285 (6% of total plan assets) at December 31, 2005 and
2004, 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.
10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
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 2006.
The following benefit payments, which reflect expected future service, are
expected to be paid:
Pension Benefits
----------------
2006 $ 146,637
2007 144,937
2008 281,720
2009 277,743
2010 313,509
Years 2011-2015 1,615,595
The Corporation also sponsors a defined contribution plan that covers
substantially all employees. The Corporation expensed contributions of $85,570
and $56,822 for the years ended December 31, 2005 and December 31, 2004,
respectively. The Corporation does not provide postretirement medical benefits.
6. Stock-Based Compensation
The Stock Option Plan adopted in 1985 ("1985 Plan") permits the issuance of
stock options and stock appreciation rights for the purchase of up to 895,522
shares of the 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. With the adoption of the 2005 Equity Incentive
Compensation Plan at the 2005 Annual Meeting, no further grants will be made
under the 1985 Plan, although unexercised awards granted in 2004 and prior
years remain outstanding.
A summary of option activity under the 1985 Plan as of December 31, 2005, and
changes during the period then ended is presented below:
Weighted- Weighted-
Average Average
Exercise Remaining
Options Price Life (Years)
------- --------- ------------
Outstanding at January 1, 2005 128,543 $18.81
Exercised (24,546) 15.99
Forfeited -- --
----------------------------------------------------------------
Outstanding at December 31, 2005 103,997 $18.24 5.07
----------------------------------------------------------------
Exercisable at December 31, 2005 42,823 $18.37 4.90
----------------------------------------------------------------
The options outstanding as of December 31, 2005 are set forth below:
Weighted Weighted
Average Average
Options Exercise Remaining
Exercise price Outstanding Price Life (Years)
-------------- ----------- -------- ------------
$13.00-$15.49 16,898 $13.25 2.06
$15.50-$17.99 32,301 16.39 4.42
$18.00-$20.49 23,057 19.70 6.39
$20.50-$23.00 31,741 21.73 6.40
------------------------------------------------------------------
Outstanding at December 31, 2005 103,997 $18.24 5.07
------------------------------------------------------------------
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, 2005 was $830,097.
The 2005 Equity Incentive Compensation Plan ("2005 Plan") permits the grant of
stock options, restricted stock awards and other stock incentives to key
employees and all non-employee directors. The 2005 Plan provides for the
issuance of up to 872,639 shares of the Corporation's Common Stock. Restricted
stock was granted to key employees on April 27, 2005 at fair market value on
that date, vesting over a three year period. Restricted stock units were
granted to non-employee directors on April 27, 2005 and to new directors on
December 1, 2005 at fair market value on grant date and vest over a one year
period. The total fair value of units that vested in 2005 was $12,500 due to
the death of a director, which thereby accelerated the vesting schedule. The
number of shares of Common Stock which remain available for future grants
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
under the 2005 Plan at December 31, 2005 is 863,609 shares. The Corporation
pays dividends and dividend equivalents on outstanding awards, which are
charged to net assets when paid. Dividends and dividend equivalents paid on
awards that are later forfeited are reclassified to compensation expense.
A summary of the status of the Corporation's awards granted under the 2005 Plan
as of December 31, 2005, and changes during the period then ended, is presented
below:
Weighted Average
Shares/ Grant-Date Fair
Awards Units Value
------ ----- ----------------
Balance at January 1, 2006 -- --
Granted:
Restricted stock 4,630 $28.06
Restricted stock units 4,400 28.62
Vested (400) 28.06
Forfeited -- --
-----------------------------------------------------
Balance at December 31, 2005 8,630 $28.35
-----------------------------------------------------
Compensation costs resulting from restricted stock and restricted stock units
granted under the 2005 Plan are recognized over the requisite service period
based on the fair value of the awards on grant date. Any unearned compensation
is subsequently expensed as services are rendered. The fair value of restricted
shares is based on the average of the high and low market price on the date an
award is granted. The total compensation costs for restricted stock granted to
employees for the year ended December 31, 2005 were $28,884. The total
compensation costs for restricted stock units granted to non-employee directors
under the 2005 Plan for the year ended December 31, 2005 were $75,412. As of
December 31, 2005, there were total unrecognized compensation costs of $152,834
related to nonvested share-based compensation arrangements granted under the
2005 Plan. Those costs are expected to be recognized over a weighted average
period of 1.7 years.
7. EXPENSES
The aggregate remuneration paid or accrued during the year ended December 31,
2005 to officers and directors amounted to $1,504,166, of which $309,662 was
paid as fees to directors who were not officers.
8. PORTFOLIO SECURITIES LOANED
The Corporation makes loans of securities to brokers, secured by cash, 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, 2005, the Corporation had securities on loan
of $5,687,500, and held collateral of $5,809,478, 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.
12
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of year $28.16 $24.06 $20.98 $24.90 $32.69
--------------------------------------------------------------------------------------------------------
Net investment income 0.53* 0.41 0.38 0.42 0.49
Net realized gains and increase (decrease)
in unrealized appreciation 8.29 5.05 3.89 (3.20) (6.81)
--------------------------------------------------------------------------------------------------------
Total from investment operations 8.82 5.46 4.27 (2.78) (6.32)
--------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.56) (0.44) (0.38) (0.43) (0.43)
Distributions from net realized gains (1.22) (0.88) (0.81) (0.68) (1.07)
--------------------------------------------------------------------------------------------------------
Total distributions (1.78) (1.32) (1.19) (1.11) (1.50)
--------------------------------------------------------------------------------------------------------
Capital share repurchases 0.10 0.01 0.02 0.01 0.06
Reinvestment of distributions (0.06) (0.05) (0.02) (0.04) (0.03)
--------------------------------------------------------------------------------------------------------
Total capital share transactions 0.04 (0.04) 0.00 (0.03) 0.03
--------------------------------------------------------------------------------------------------------
Net asset value, end of year $35.24 $28.16 $24.06 $20.98 $24.90
--------------------------------------------------------------------------------------------------------
Per share market price, end of year $32.34 $25.78 $23.74 $19.18 $23.46
--------------------------------------------------------------------------------------------------------
Total Investment Return
Based on market price 32.3% 14.4% 30.8% (13.7)% (8.7)%
Based on net asset value 32.0% 23.3% 21.2% (11.1)% (19.0)%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $761,914 $618,887 $522,941 $451,275 $526,492
Ratio of expenses to average net assets 0.59% 0.56% 0.74% 0.49% 0.35%
Ratio of net investment income to average net assets 1.61% 1.58% 1.75% 1.84% 1.67%
Portfolio turnover 10.15% 13.44% 10.20% 9.69% 6.74%
Number of shares outstanding at end of year
(in 000's) 21,621 21,980 21,737 21,510 21,148
--------------------------------------------------------------------------------------------------------
* 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.
13
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
December 31, 2005
Shares Value (A)
-----------------------------------------------------------------
Stocks and Convertible Securities -- 97.8%
Energy -- 86.5%
Internationals -- 22.4%
BP plc ADR.......................... 600,000 $ 38,532,000
Chevron Corp........................ 635,000 36,048,950
Exxon Mobil Corp.................... 1,140,000 64,033,800
Royal Dutch Shell plc ADR........... 275,000 16,909,750
Total S.A. ADR...................... 120,000 15,168,000
------------
170,692,500
------------
Domestics -- 11.3%
Alon USA Energy, Inc. (B)........... 6,000 117,900
Amerada Hess Corp................... 65,000 8,243,300
ConocoPhillips...................... 510,000 29,671,800
Holly Corp.......................... 210,000 12,362,700
Kerr-McGee Corp..................... 107,647 9,780,806
Murphy Oil Corp..................... 256,400 13,843,036
Valero Energy Corp.................. 240,000 12,384,000
------------
86,403,542
------------
Producers -- 20.3%
Apache Corp......................... 177,000 12,128,040
Burlington Resources Inc............ 246,800 21,274,160
Devon Energy Corp................... 355,000 22,201,700
EOG Resources, Inc.................. 345,000 25,312,650
Newfield Exploration Co. (B)........ 175,000 8,762,250
Noble Energy, Inc................... 430,000 17,329,000
Occidental Petroleum Corp........... 200,000 15,976,000
Pioneer Natural Resources Co........ 250,000 12,817,500
XTO Energy Inc...................... 435,000 19,113,900
------------
154,915,200
------------
Distributors -- 12.3%
AGL Resources Inc................... 170,000 5,917,700
Duke Energy Corp. (C)............... 217,624 5,973,779
Energen Corp........................ 400,000 14,528,000
Equitable Resources, Inc............ 450,000 16,510,500
Keyspan Corp........................ 70,000 2,498,300
MDU Resources Group, Inc............ 250,000 8,185,000
National Fuel Gas Co................ 200,000 6,238,000
New Jersey Resources Corp........... 200,000 8,378,000
Questar Corp........................ 200,000 15,140,000
Williams Companies, Inc............. 450,000 10,426,500
------------
93,795,779
------------
14
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2005
Shares
or Units Value (A)
---------------------------------------------------------------------
Services -- 20.2%
Baker Hughes Inc......................... 130,000 $ 7,901,400
BJ Services Co........................... 740,000 27,135,800
GlobalSantaFe Corp....................... 290,000 13,963,500
Grant Prideco Inc. (B)................... 308,000 13,588,960
Hercules Offshore, Inc. (B).............. 126,000 3,579,660
Nabors Industries Ltd. (B)............... 260,000 19,695,000
Noble Corp............................... 185,000 13,049,900
Precision Drilling Income Trust Units.... 300,000 9,870,000
Schlumberger Ltd......................... 280,000 27,202,000
Weatherford International Ltd. (B)....... 493,560 17,866,872
------------
153,853,092
------------
Basic Industries -- 11.3%
Basic Materials & Other -- 10.7%
Air Products and Chemicals, Inc.......... 125,000 7,398,750
Aqua America, Inc........................ 394,799 10,778,013
Arch Coal Inc............................ 200,000 15,900,000
Consol Energy Inc........................ 178,700 11,647,666
duPont (E.I.) de Nemours and Co.......... 157,500 6,693,750
General Electric Co...................... 454,800 15,940,740
Martin Marietta Materials, Inc........... 40,000 3,068,800
Rohm & Haas Co........................... 200,000 9,684,000
------------
81,111,719
------------
Paper and Forest Products -- 0.6%
Smurfit-Stone Container Corp. (B)........ 300,000 4,251,000
------------
Total Stocks and Convertible Securities
(Cost $316,230,755) (D)...................... $745,022,832
------------
15
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2005
Prin. Amt. Value (A)
-----------------------------------------------------------------------------------------
Short-Term Investments -- 2.2%
U.S. Government Obligations -- 1.0%
U.S. Treasury Bills, 3.91%, due 2/16/06..................... $7,500,000 $ 7,462,529
------------
Time Deposit -- 0.1%
Wachovia Bank Grand Cayman, 3.30%, due 1/3/06............... 463,973
------------
Commercial Paper -- 1.2%
American General Finance, Inc., 4.30%, due 1/10/06.......... 4,750,000 4,744,043
General Electric Capital Corp., 4.23-4.26%, due 1/5/06...... 4,500,000 4,497,877
------------
9,241,920
------------
Total Short-Term Investments
(Cost $17,168,422)............................................ 17,168,422
------------
Securities Lending Collateral -- 0.8%
Brown Brothers Investment Trust, 4.23%, due 1/3/06.......... 5,809,478
------------
Total Securities Lending Collateral
(Cost $5,809,478)............................................. 5,809,478
------------
Total Investments -- 100.8%
(Cost $339,208,655)........................................... 768,000,732
Cash, receivables, prepaid expenses and other assets, less
liabilities -- (0.8)%..................................... (6,087,080)
------------
Net Assets -- 100%.............................................. $761,913,652
--------------------------------------------------------------------------------
Notes:
(A) See note 1 to financial statements. Securities are listed on the New York
Stock Exchange, the American Stock Exchange, or the NASDAQ.
(B) Presently non-dividend paying.
(C) All or a portion of these securities are on loan. See Note 8 to Financial
Statements.
(D) The aggregate market value of stocks held in escrow at December 31, 2005
covering open call option contracts written was $13,289,140. In addition,
the required aggregate market value of securities segregated by the
custodian to collaterize open put option contracts written was $5,437,500.
16
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
--------------------------------------------------------------------------------
December 31, 2005
Contracts Contract
(100 shares Strike Expiration Appreciation/
each) Security Price Date (Depreciation)
-----------------------------------------------------------------------------
COVERED CALLS
120 Apache Corp.................... $ 70 Jan 06 $ 9,239
150 Aqua America, Inc.............. 30 Jun 06 (3,291)
150 Burlington Resources Inc....... 80 Jan 06 (84,450)
200 ConocoPhillips................. 65 Feb 06 7,399
200 ConocoPhillips................. 75 May 06 11,399
100 Devon Energy Corp.............. 65 Jan 06 1,699
100 EOG Resources, Inc............. 70 Jan 06 (22,801)
100 EOG Resources, Inc............. 85 Jan 06 27,199
50 Kerr-McGee Corp................ 100 Feb 06 3,100
50 Kerr-McGee Corp................ 100 Apr 06 3,849
100 Kerr-McGee Corp................ 105 Jul 06 6,699
100 Martin Marietta Materials, Inc. 75 Jan 06 (22,300)
100 Pioneer Natural Resources Co... 65 Mar 06 5,199
250 Royal Dutch Shell plc.......... 70 Jan 06 21,748
150 Schlumberger Ltd............... 100 Jan 06 (2,700)
20 Total S.A...................... 155 May 06 2,640
----- --------
1,940.. (35,372)
----- --------
COLLATERALIZED PUTS
100 Consol Energy Inc.............. 50 Jan 06 11,199
150 Exxon Mobil Corp............... 55 Jan 06 16,798
250 Exxon Mobil Corp............... 52.50 Apr 06 (7,000)
150 Exxon Mobil Corp............... 50 Jul 06 (3,450)
100 Martin Marietta Materials, Inc. 65 Jan 06 11,449
100 Martin Marietta Materials, Inc. 65 Apr 06 11,945
200 Valero Energy Corp............. 37.50 Jan 06 13,699
----- --------
1,050.. 54,640
----- --------
$ 19,268
========
17
CHANGES IN PORTFOLIO SECURITIES
--------------------------------------------------------------------------------
During the Three Months Ended December 31, 2005
(unaudited)
Shares or Units
-----------------------------------------
Held
Additions Reductions Dec. 31, 2005
-------------------------------------------------------------------------------
Aqua America, Inc.................... 104,999/(1)/ 25,200 394,799
Arch Coal Inc........................ 40,000 200,000
Consol Energy Inc.................... 20,000 178,700
Hercules Offshore, Inc............... 126,000 126,000
Precision Drilling Income Trust Units 300,000/(2)/ 300,000
Valero Energy Corp................... 160,000/(3)/ 240,000
Weatherford International Ltd........ 288,560/(4)/ 493,560
AGL Resources Inc.................... 27,000 170,000
ConocoPhillips....................... 50,000 510,000
Martin Marietta Materials, Inc....... 20,000 40,000
New Jersey Resources Corp............ 23,800 200,000
Pioneer Natural Resources Co......... 41,000 250,000
Precision Drilling Corp.............. 200,000/(2)/ --
--------
/(1) /By stock split.
/(2) /Received one share of Precision Drilling Income Trust Units for each
share of Precision Drilling Corp. surrendered.
/(3) /Received 120,000 shares by stock split.
/(4) /Received 246,780 shares by stock split. Received 41,780 shares by stock
dividend on shares of Precision Drilling Corp. held.
-------------------------
Common Stock
Listed on the New York Stock Exchange
and the Pacific Exchange
Petroleum & Resources Corporation
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(410) 752-5900 or (800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
Counsel: Chadbourne & Parke L.L.P.
Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP
Transfer Agent & Registrar: American Stock Transfer & Trust Co.
Custodian of Securities: Brown Brothers Harriman & Co.
18
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, 2005, 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, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 13, 2006
-------------------------
HISTORICAL FINANCIAL STATISTICS
--------------------------------------------------------------------------------
Dividends Distributions
From Net From Net
Net Asset Investment Realized
Value of Shares Value Income Gains
Dec. 31 Net Assets Outstanding* Per Share* Per Share* Per Share*
---------------------------------------------------------------------
1991 $314,024,187 16,778,358 $18.71 $.61 $ .82
1992 320,241,282 17,369,255 18.44 .51 .82
1993 355,836,592 18,010,007 19.76 .55 .87
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
2004 618,887,401 21,979,676 28.16 .44 .88
2005 761,913,652 21,621,072 35.24 .56 1.22
--------
*Adjusted for 3-for-2 stock split effected in October 2000.
19
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, 2005 are
available (i) without charge, upon request, by calling the Corporation's toll
free number at (800) 638-2479; (ii) on the Corporation's website by clicking on
"Corporate Information" heading on the website; and (iii) on the Securities and
Exchange Commission's website at 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 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.
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.
20
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 and
Pacific 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 22).
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 and on Mondays
in The Wall Street Journal in a table titled "Closed-End Funds." The table
compares the net asset value at the close of the week's last business day to
the market price of the shares, and shows the amount of the discount or premium.
Petroleum's daily trading is shown in the stock tables of most 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 22.
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.
21
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.
22
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 64 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 62 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 81 (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.
--------------------------------------------------------------------------------------------------------------------------
Roger W. Gale Director One Since President & CEO of GF Two Director of The Adams
7 St. Paul Street, Year Dec. Energy, LLC (consultants to Express Company
Suite 1140 2005 electric power companies). (investment company), Ormat
Baltimore, MD Formerly member of (geothermal and renewable
21202 management group, PA energy), and U.S. Energy
Age 59 Consulting Group (energy Association.
consultants).
--------------------------------------------------------------------------------------------------------------------------
Thomas H. Lenagh Director One Since Financial Advisor, Chairman of Two Director of The Adams
7 St. Paul Street, Year 1987 the Board, Photonics Products Express Company and
Suite 1140 Inc. (crystals). Formerly Cornerstone Funds, Inc.
Baltimore, MD 21202 Chairman of the Board and (3 funds) (investment
Age 87 CEO of Greiner Engineering companies).
Inc. (formerly Systems
Planning Corp.) (consultants),
and Chief Investment Officer
of the Ford Foundation
(charitable foundation).
--------------------------------------------------------------------------------------------------------------------------
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 55 Business, Columbia University.
Formerly Associate Dean and
Director of Executive
Education, and Associate
Professor, Columbia
University.
--------------------------------------------------------------------------------------------------------------------------
23
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)
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 83 (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 Dec. LLC (consultants to Express Company
Suite 1140 2005 pharmaceutical and (investment company),
Baltimore, MD 21202 biotechnology industries). LaJolla Pharmaceutical
Age 59 Formerly Chairman, President Company, and Depomed, Inc.
& CEO of Guilford (specialty pharmaceuticals).
Pharmaceuticals
(pharmaceuticals and
biotechnology).
-------------------------------------------------------------------------------------------------------------------------
Robert J. M. Wilson Director One Since Retired President of the Two Director of The Adams
7 St. Paul Street, Year 1975 Corporation (since 1986) and Express Company
Suite 1140 retired President of The Adams (investment company).
Baltimore, MD 21202 Express Company (since 1986).
Age 85
-------------------------------------------------------------------------------------------------------------------------
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 59 of the
Board
since
1991
-------------------------------------------------------------------------------------------------------------------------
24
PETROLEUM & RESOURCES CORPORATION
--------------------------------------------------------------------------------
Board Of Directors
Enrique R. Arzac/(1)(3) / Kathleen T.
McGahran/(2)(4)/
Phyllis O. Bonanno/(1)(3)/
Douglas G. Ober/(1)/
Daniel E. Emerson/(2)(3) /
John J. Roberts/(1)(3)/
Roger W. Gale/(3)(4)/
Craig R. Smith/(2)(4)/
Thomas H. Lenagh/(1)(4) /
Robert J.M. Wilson/(1)(2)/
--------
/(1)/ Member of Executive Committee
/(2)/ Member of Audit Committee
/(3)/ Member of Compensation Committee
/(4)/ Member of Retirement Benefits Committee
Officers
Douglas G. Ober Chairman, President
and Chief Executive
Officer
Joseph M. Truta Executive Vice President
Lawrence L. Hooper, Jr. Vice President, General
Counsel and Secretary
Maureen A. Jones Vice President, Chief
Financial Officer and
Treasurer
Nancy J.F. Prue Vice President
Christine M. Sloan Assistant Treasurer
Geraldine H. Pare Assistant Secretary
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 billed for
professional services rendered by its independent auditors,
PricewaterhouseCoopers LLP, for the audits of the
Corporation's annual and semi-annual financial statements
for 2005 and 2004 were $59,201 and $47,142, respectively.
(b) Audit Related Fees. There were no audit-related fees
in 2005 and 2004.
(c) Tax Fees. The aggregate fees billed 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 2005 and 2004 were $7,964 and $8,524, respectively.
(d) All Other Fees. The aggregate fees billed for
services to the Corporation by PricewaterhouseCoopers LLP,
other than for the services referenced above for 2005 and
for 2004 were $800 and $0, respectively. The $800 billed
for services in 2005 were in connection with the preparation
and review of the registration statement filed with the
Securities and Exchange Commission relating to the 2005
Equity Incentive Compensation Plan
(e) (1) Audit Committee Pre-Approval Policy. As of 2005,
all services to be performed for registrant by
PricewaterhouseCoopers LLP must be pre-approved by the audit
committee. All services performed in 2005 were pre-approved
by the committee.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate fees billed by PricewaterhouseCoopers
LLP for non-audit professional services rendered to
registrant for 2005 and 2004 were $7,964 and $8,524,
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, Craig R. Smith and Robert J.M. Wilson.
(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 POLICIES & PROCEDURES
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 analyzes 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. Staggered boards are used to
help create a roadblock to a possible takeover of a company
or to entrench incumbent management and board. 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 anti-takeover
provisions. For example, we generally vote in favor of
stockholder proposals to rescind or require a stockholder
vote on anti-takeover provisions such as poison pills and
the like.
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 13, 2006. 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 $1,266,728,652 as of December 31, 2005.
Mr. Ober is Chairman and Chief Executive Officer of
Adams and Mr. Truta is President. This information is
as of February 13, 2006. 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 April 2005, 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.
The basis for the cash incentive compensation
determinations for Adams is the same as for Petroleum,
except that the portion of the incentive based upon fund
performance uses the S&P 500 Index as the benchmark, over
a one and three year period. All of the above information
is as of December 31, 2005.
(4) Using a valuation date of December 31, 2005, 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
-------- --------- --------- --------- ---------
Jul. 2005 91,700 $ 30.95 91,700 628,246
Aug. 2005 134,300 $ 31.85 134,300 493,946
Sep. 2005 104,150 $ 34.40 104,150 389,796
Oct. 2005 73,900 $ 32.81 73,900 315,896
Nov. 2005 30,900 $ 31.78 30,900 284,996
Dec. 2005 25,700 $ 33.50 25,700 1,034,677
-------- --------- --------- --------- ---------
Total 460,650(1) $ 32.49 460,650(2) 1,034,677(2)
(1) There were no shares purchased other than through a
publicly announced plan or program.
(2.a) The Plan was announced on December 9, 2004 and was
reapproved on December 8, 2005.
(2.b) The share amount approved in 2004 was 5% of
outstanding shares, or approximately 1,080,746 shares, and
in 2005 was 5% of outstanding shares, or approximately
1,060,377 shares.
(2.c) The Plan will expire on or about December 8, 2006.
(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 13, 2006, 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 13, 2006
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 13, 2006
BY: /s/ Maureen A. Jones
-----------------------
Maureen A. Jones
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 13, 2006