Petroleum
& Resources
Corporation(R)
Our 75th Anniversary
1929-2004
Annual Report 2003
investing in resources for the future(R)
2003 AT A GLANCE
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THE COMPANY
.. 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
NYSE Symbol................... PEO
Market Price as of 12/31/03 $23.74
52-Week Range....... $23.77-$18.28
Discount as of 12/31/03...... 1.3%
Shares Outstanding..... 21,736,777
SUMMARY FINANCIAL INFORMATION
Year Ended December 31
2003 2002
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Net asset value per share $ 24.06 $ 20.98
Total net assets 522,941,279 451,275,463
Unrealized appreciation 185,072,550 118,780,607
Net investment income 8,134,186 8,983,077
Total realized gain 17,219,079 14,332,921
Total return (based on market value) 30.8% (13.7)%
Total return (based on net asset value) 21.2% (11.1)%
Expense ratio 0.74% 0.49%
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2003 DIVIDENDS AND DISTRIBUTIONS
Amount
Paid (per share) Type
-----------------------------------------------------
March 1, 2003 $0.09 Long-term capital gain
March 1, 2003 0.04 Investment income
June 1, 2003 0.13 Investment income
September 1, 2003 0.13 Investment income
December 27, 2003 0.71 Long-term capital gain
December 27, 2003 0.01 Short-term capital gain
December 27, 2003 0.08 Investment income
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$1.19
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2004 ANNUAL MEETING OF STOCKHOLDERS
Location: The Center Club, 100 Light Street, 16/th/ Floor, Baltimore, Maryland
21202
Date: March 30, 2004
Time: 11:00 a.m.
Holders of Record: February 13, 2004
PORTFOLIO REVIEW
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TEN LARGEST PORTFOLIO HOLDINGS (12/31/03)
Market Value % of Net Assets
------------------------------------------------------
Exxon Mobil Corp. $ 43,050,000 8.2
Royal Dutch Petroleum Co. 31,434,000 6.0
BP plc ADR 26,649,000 5.1
ChevronTexaco Corp. 25,053,100 4.8
ConocoPhillips 17,048,200 3.3
Schlumberger Ltd. 15,321,600 2.9
BJ Services Co. 13,283,000 2.5
Total S.A. ADR 12,951,400 2.5
Devon Energy Corp. 11,378,707 2.2
Equitable Resources Inc. 10,730,000 2.1
------------ ----
Total $206,899,007 39.6%
------------ ----
SECTOR WEIGHTINGS (12/31/03)
[CHART]
Internationals 27.7%
Domestics 7.7%
Producers 12.4%
Distributors 15.5%
Services 11.3%
Basic Materials & Other 9.9%
Paper & Forest Products 3.2%
Cash & Equivalent 12.2%
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
--------------------------------------------------------------
1989 $12,798 $ 602 $ 604 $14,004 $16,125
1990 11,909 1,229 1,099 14,237 16,201
1991 12,322 2,012 1,645 15,979 17,254
1992 11,966 2,736 2,043 16,745 18,348
1993 13,033 3,857 2,742 19,632 21,163
1994 11,966 4,385 3,121 19,472 20,703
1995 13,388 5,895 4,180 23,463 26,175
1996 16,474 8,407 5,889 30,770 32,837
1997 17,299 10,166 6,865 34,330 39,000
1998 14,519 9,980 6,458 30,957 34,666
1999 15,287 12,253 7,505 35,045 42,902
2000 19,417 18,045 10,221 47,683 57,077
2001 16,680 17,416 9,446 43,542 46,214
2002 13,637 15,487 8,449 37,573 41,100
2003 16,879 20,943 11,320 49,142 49,804
ILLUSTRATION OF AN ASSUMED 15 YEAR INVESTMENT OF $10,000
(unaudited)
Investment income dividends and capital gains distri- butions are taken in
additional shares. This chart covers the years 1989-2003. Fees for the
reinvestment of dividends are assumed as $2.50 per reinvestment and commissions
of $0.05 per share. 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 Market Cumulative Market
Market Value of Value of Capital Value of Total Market Total Net
Original Shares Gains Distributions Income Dividends Value Asset Value
--------------- ------------------- ---------------- ------------ -----------
$10,000 $10,000 $10,000 $10,000 $11,774
1989 12,798 602 604 14,004 16,125
1990 11,909 1,229 1,099 14,237 16,201
1991 12,322 2,012 1,645 15,979 17,254
1992 11,966 2,736 2,043 16,745 18,348
1993 13,033 3,857 2,742 19,632 21,163
1994 11,966 4,385 3,121 19,472 20,703
1995 13,388 5,895 4,180 23,463 26,175
1996 16,474 8,407 5,889 30,770 32,837
1997 17,299 10,166 6,865 34,330 39,000
1998 14,519 9,980 6,458 30,957 34,666
1999 15,287 12,253 7,505 35,045 42,902
2000 19,417 18,045 10,221 47,683 57,077
2001 16,680 17,416 9,446 43,542 46,214
2002 13,637 15,487 8,449 37,573 41,100
2003 16,879 20,943 11,320 49,142 49,804
2
LETTER TO STOCKHOLDERS
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Each year at this time, we share with you our perspective on the past year and
provide our view on the energy markets and outlook for the ensuing year. As
noted on the cover of this report, your fund is observing its seventy-fifth
anniversary this year. In January 1929, an offering of 3,250,000 shares was
made to the public, creating the first and only closed-end sector fund focused
on natural resources. Petroleum & Resources is one of only six closed-end funds
to survive from that era to today.
THE YEAR IN REVIEW
Performance
The Petroleum & Resources fund performed well in 2003. The total return on net
assets, including income and capital gains distributions for the calendar year
was 21.2%. On a market value basis, the total return was 30.8%. Comparable
figures for the Standard & Poor's 500 Index and the Dow Jones Energy Index were
28.7% and 22.9%, respectively. Double digit gains in the energy sector in
December allowed the sector to significantly narrow the performance gap versus
the strong broader market.
As noted above, after two years of declines, the energy stocks and the broader
market posted strong gains. Within the Dow Jones Energy Index, the pipeline
stocks rose 78% for the year, as the industry began rebuilding following the
energy trading issues of the prior two years. Exploration companies in the
Index were up 29%, the major oil companies were up 22%, and the oil drilling
group was up 14%. The coal stocks represented in the Index had an outstanding
year, advancing 60%. With our substantial holdings in international companies
such as Royal Dutch and BP, which are not included in the Energy Index and
underperformed it, the net asset value return for Petroleum & Resources was
slightly below that of the Index. Most of our holdings outside of the segments
represented in the Energy Index also performed well during the year. Our water
utility holding provided a 31% return and our diverse holdings in basic
industry and industrials had solid gains as well, led by the 57% return in
machinery. Offsetting these to some degree was the performance of our natural
gas utility holdings, which were only up 18% for the year. While this would
normally be an outstanding result for this group, the advances of the other
sectors overshadowed it.
Surging prices for both crude oil and natural gas provided a positive operating
environment for energy companies throughout the year. Energy stocks
outperformed the weak broader market in the first quarter as the cold weather
in the Northeast and the anticipation of military action in Iraq drove
commodity prices higher. The S&P 500 Index declined 3.2% through March while
energy stocks fell less than 1%. Energy equities moved higher in April as oil
prices moved over $30 per barrel again, but the broader market outpaced this
sector. Though both oil and natural gas prices remained strong through the rest
of the year, stocks in the group underperformed the overall market through
November. Other sectors, including consumer, information technology and
industrial stocks, performed well, reflecting the strong economic recovery. In
December, however, energy stocks once again outperformed the broader market in
response to higher commodity prices. For the month, the sector advanced 13.5%
while the S&P 500 rose only 5.2%.
Oil Industry
Crude oil prices averaged over $30 per barrel in 2003, the highest yearly
average in over 20 years. Prices spiked to over $39 per barrel early in 2003,
as the consequence of suspected Iraqi weapons violations became clear. The
anticipation of the U.S. invasion created supply uncertainty at the same time
that Venezuelan production was curtailed due to civil unrest. Oil prices peaked
in February, and declined to a low of $25 in April as the conflict in Iraq
ended and rebuilding talks began. Increased production by the other OPEC
countries as well as countries such as Russia helped offset the production lost
from Iraq and the workers' strike in Venezuela. The higher production levels by
OPEC were confirmed when the organization met in April and agreed to increase
its quota to 25.4 million barrels per day. The oil price correction was
short-lived, however, as it became apparent that Iraqi production would not
return quickly due to on-going sabotage of facilities and pipelines. Oil prices
quickly jumped back to the $32 level and traded above $30 per barrel for much
of the remainder of 2003. Iraq's production was slow in rebuilding and
instability in Venezuela and Nigeria continued to disrupt supplies. Russia's
exports increased 9% during the year, adding to the worldwide supply. A brief
price drop to the $27 level occurred late in the summer and into September.
OPEC responded quickly by reducing its quota to 24.5 million barrels a day and
the price rally resumed. While supply issues dominated the market, record
demand in the U.S. and China contributed to the high prices. The beginning,
ending and average prices for oil were all in the $31 range for 2003.
Natural Gas and Coal
Natural gas prices increased sharply early in the year from $4.25 per mcf in
January to a spike of $8.50 in March. A decline in deliverability and the
sustained cold weather in the Northeast led to the commodity price rally as
inventories dropped to near record lows. As the heating season concluded, gas
prices dropped to
3
LETTER TO STOCKHOLDERS (CONTINUED)
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the $5 level and traded in a fairly narrow band for most of the remainder of
the year. The cool summer enabled gas to be directed to the inventory rebuild
and by fall gas in storage had reached normal levels. The U.S. industrial
recovery contributed to rising demand and provided upward price bias. Gas
prices were volatile but remained high through the end of 2003, despite full
storage and mild weather. In this high price environment, liquefied natural gas
(LNG) imports were attractive and provided 1% of U.S. demand for the year. Coal
prices also experienced a strong recovery in 2003 in response to gas prices,
weather and increased demand.
INVESTMENT RESULTS
Net assets of the Corporation on December 31, 2003 were $522,941,279 or $24.06
per share on 21,736,777 shares outstanding. This compares with $451,275,463 or
$20.98 per share on 21,510,067 shares outstanding a year earlier.
Net investment income for 2003 was $8,134,186 compared to $8,983,077 for 2002.
These earnings are equivalent to $0.38 and $0.42 per share, respectively, on
the average number of shares outstanding throughout each year. In 2003, our
0.74% expense ratio (expenses to average net assets) was once again at a low
level compared to the industry.
Net realized gains amounted to $17,219,079 during the year, while the
unrealized appreciation on investments increased from $118,780,607 at December
31, 2002 to $185,072,550 at year end, a 56% increase.
DIVIDENDS AND DISTRIBUTIONS
Total dividends and distributions paid in 2003 were $1.19 per share compared to
$1.11 in 2002. As announced on November 13, 2003, a year-end distribution
consisting of investment income of $0.08 and capital gains of $0.72 was made on
December 27, 2003, both realized and taxable in 2003. On January 8, 2004, an
additional distribution of $0.13 per share was declared payable March 1, 2004,
representing the balance of undistributed net investment income and capital
gains earned in 2003 and an initial distribution from 2004 net investment
income, all taxable to shareholders in 2004.
OUTLOOK FOR 2004
Crude Oil
OPEC's recent guidance has called for a production increase when prices close
above the $22-$28 target range for 20 days. The target range has been exceeded
for more than 20 days, yet OPEC remains firm on the quota and has not increased
production, causing oil prices to move higher early in 2004. The resolve to
maintain the current quota is based on the weak dollar and the desire to
maximize revenues before the anticipated demand decline in the spring. OPEC
nations believe that higher oil prices are justified because the declining U.S.
dollar has lowered their purchasing power. In the first quarter, prices are
expected to remain high in response to higher economic demand and weather
factors. As demand declines seasonally in the spring, prices should respond.
The OPEC 10 (excluding Iraq) appear inclined towards cutting their production
in 2004 in order to maintain the desired price range and allow for incremental
Iraqi production.
The anticipated return of Iraq to pre-war production levels during the year as
well as rising exports from Venezuela and Nigeria will require quota
adjustments. The timing of Iraq's return to over 2 million barrels of
production per day is dependent on the ability to secure the pipelines. As
those volumes return and we move into a weak demand period, oil prices are
expected to fall from the year-end price of over $32 to a price range of
$25-$28 this year. While lower prices are anticipated, the decline in prices
may be hindered by the low inventory levels in the industrialized countries and
the expected worldwide demand increase of over 1 million barrels per day. The
apparent demand recovery in the face of $30 oil prices creates the possibility
that prices will stay in the upper end of the range. Against the backdrop of
rising demand, supply growth appears manageable throughout the year. Non-OPEC
production gains of over 1 million barrels per day combined with OPEC
cooperation should provide a balance for oil markets. The extent of the
worldwide recovery and geopolitical issues in the Middle East, Nigeria and
Venezuela will ultimately determine oil prices for 2004.
Natural Gas
The year began with a first day jump of 10% in natural gas prices as
expectations that weather-related demand will be strong and economic indicators
confirmed a U.S. recovery. The outlook for early 2004 is for natural gas prices
to remain in the $5-$6 per mcf range until winter ends and decline to an
average of $4.25-$4.75 by year-end. A repeat of last year's heating demand
would put an upward bias on prices. Volatility will remain high due to weather
sensitivity and the fuel switching ability of natural gas users. Demand and
prices will be driven by the economic recovery and a gas price that is too high
may result in demand reduction. LNG will continue to provide a viable source to
meet natural gas demand, as will incremental gas production from the Rocky
Mountains. LNG imports are expected to increase in 2004 and larger supplies are
necessary to satisfy future U.S. demand. Similarly, the competitive position of
coal has and will continue to benefit from rising natural gas demand, resulting
in increased coal consumption by electric utilities. These
4
LETTER TO STOCKHOLDERS (CONTINUED)
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higher than historic natural gas prices will provide an attractive environment
for increasing deliverability in the United States.
Corporate Governance
There has been a great deal of attention recently paid to illegal and unethical
activities in the mutual fund industry. We feel it is important to remind our
shareholders that we condemn the activities that have been uncovered and assure
you that we have not engaged in them. Since your fund's shares are publicly
traded, trading arrangements that benefit some shareholders over others are not
possible. Thus, should they wish to do so, all of our shareholders are able to
make after-hours trades, to engage in rapid trading of our shares, and to
attempt to time trades, and no shareholders are given special privileges in
this regard. While we maintain relationships with many brokerage houses and
encourage them to recommend Petroleum & Resources as an investment, we do not
make "soft dollar" payments to brokers for this purpose. All commissions paid
on buying or selling stocks for the portfolio are reviewed by the Board of
Directors quarterly. Our use of commission dollars to pay for important
research to better enable our analysts to make their stock selections is
conducted in strict accordance with applicable SEC rules.
Two new Directors were elected to the Board, effective November 13, 2003,
bringing the total number to thirteen. Ms. Phyllis O. Bonanno, President of
International Trade Solutions, Inc., brings wide experience in global trade to
the Board, while Ms. Kathleen T. McGahran, Principal and Director of Pelham
Associates, adds a wealth of specialized knowledge in accounting to our range
of skills. All of the Directors except myself qualify as independent directors
by SEC definition, and thus more than 90% of the Board consists of directors
who are independent of management. In addition to monthly meetings of the full
Board of Directors, the independent Directors meet separately every other month.
SHARE REPURCHASE PROGRAM
On December 11, 2003, 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 same
restriction as in the past, namely that shares can only be repurchased as long
as the discount of the market price of the shares from the net asset value is
8% or greater.
From the beginning of 2004 through February 12, 2004, no shares have been
repurchased under the program.
----------
The proxy statement for the Annual Meeting of Stockholders to be held in
Baltimore, Maryland on March 30, 2004, will be mailed on or about February 20,
2004 to holders of record on February 13, 2004.
By order of the Board of Directors,
/s/ Douglas G. Ober
Douglas G. Ober
Chairman, President and
Chief Executive Officer
February 12, 2004
5
STATEMENT OF ASSETS AND LIABILITIES
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December 31, 2003
Assets
Investments* at value:
Common stocks and convertible securities
(cost $274,472,378) $459,645,254
Short-term investments (cost $63,964,563) 63,964,563
Securities lending collateral (cost $22,322,240) 22,322,240 $545,932,057
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Cash 376,099
Dividends and interest receivable 593,446
Prepaid expenses and other assets 1,181,923
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Total Assets 548,083,525
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Liabilities
Investment securities purchased 1,102,769
Open written option contracts at value (proceeds $99,924) 200,250
Obligations to return securities lending collateral 22,322,240
Accrued expenses and other liabilities 1,516,987
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Total Liabilities 25,142,246
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Net Assets $522,941,279
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Net Assets
Common Stock at par value $1.00 per share, authorized
50,000,000 shares; issued and outstanding 21,736,777 shares $ 21,736,777
Additional capital surplus 312,813,521
Undistributed net investment income 1,500,752
Undistributed net realized gain on investments 1,817,679
Unrealized appreciation on investments 185,072,550
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Net Assets Applicable to Common Stock $522,941,279
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Net Asset Value Per Share of Common Stock $24.06
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* See schedule of investments on pages 12 through 14.
The accompanying notes are an integral part of the financial statements.
6
Investment Income
Income:
Dividends $10,678,433
Interest and other income 911,598
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Total income 11,590,031
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Expenses:
Investment research 1,485,642
Administration and operations 914,907
Directors' fees 215,334
Reports and stockholder communications 253,983
Transfer agent, registrar and custodian expenses 174,085
Auditing and accounting services 77,230
Legal services 25,404
Occupancy and other office expenses 143,895
Travel, telephone and postage 57,012
Other 108,353
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Total expenses 3,455,845
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Net Investment Income 8,134,186
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Realized Gain and Change in Unrealized Appreciation on Investments
Net realized gain on security transactions 17,219,079
Change in unrealized appreciation on investments 66,291,943
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Net Gain on Investments 83,511,022
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Change in Net Assets Resulting from Operations $91,645,208
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The accompanying notes are an integral part of the financial statements.
7
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
For the Year Ended
--------------------------
Dec. 31, 2003 Dec. 31, 2002
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From Operations:
Net investment income $ 8,134,186 $ 8,983,077
Net realized gain on investments 17,219,079 14,332,921
Change in unrealized appreciation on investments 66,291,943 (82,017,470)
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Change in net assets resulting from operations 91,645,208 (58,701,472)
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Distributions to Stockholders From:
Net investment income (8,108,325) (9,069,217)
Net realized gain from investment transactions (17,260,893) (14,302,830)
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Decrease in net assets from distributions (25,369,218) (23,372,047)
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From Capital Share Transactions:
Value of shares issued in payment of distributions 9,783,141 9,954,365
Cost of shares purchased (note 4) (4,393,315) (3,097,181)
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Change in net assets from capital share transactions 5,389,826 6,857,184
------------------------------------------------------------------------------------------
Total Change in Net Assets 71,665,816 (75,216,335)
Net Assets:
Beginning of year 451,275,463 526,491,798
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End of year (including undistributed net investment
income of $1,500,752 and $1,474,891, respectively) $522,941,279 $451,275,463
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The accompanying notes are an integral part of the financial statements.
8
NOTES TO FINANCIAL STATEMENTS
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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, including options, at December 31, 2003 was $360,929,608, and net
unrealized appreciation aggregated $185,102,373, of which the related gross
unrealized appreciation and depreciation were $205,468,433 and $20,366,060,
respectively. As of December 31, 2003, the tax basis of distributable earnings
was $967,194 of undistributed ordinary income and $1,453,807 of undistributed
long-term capital gain.
Distributions paid by the Corporation during the year ended December 31, 2003
were classified as ordinary income of $8,321,192 and capital gain of
$17,048,026. 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, and no one
person is primarily responsible for making recommendations to that committee.
Purchases and sales of portfolio securities, other than options and short-term
investments, during the year ended December 31, 2003 were $41,449,731 and
$65,509,697, 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,
2003 can be found on page 15.
Transactions in written covered call and collateralized put options during the
year ended December 31, 2003 were as follows:
Covered Calls Collateralized Puts
------------------- -------------------
Contracts Premiums Contracts Premiums
--------- --------- --------- ---------
Options outstanding,
December 31, 2002 625 $ 58,228 300 $ 32,392
Options written 2,200 279,849 2,250 285,681
Options terminated in
closing purchase
transactions (100) (9,600) (100) (10,143)
Options expired (1,785) (213,426) (1,916) (248,649)
Options exercised (490) (52,119) (184) (22,289)
---------------------------------------------------------------
Options outstanding,
December 31, 2003 450 $ 62,932 350 $ 36,992
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4. CAPITAL STOCK
The Corporation has 5,000,000 authorized and unissued preferred shares without
par value.
On December 27, 2002, the Corporation issued 521,854 shares of its Common Stock
at a price of $19.075 per share (the average market price on December 9, 2002)
to stockholders of record November 25, 2002 who elected to take stock in
payment of the distribution from 2002 capital gain and investment income.
On December 27, 2003, the Corporation issued 450,110 shares of its Common Stock
at a price of $21.735 per share (the average market price on December 8, 2003)
to stockholders of record November 24, 2003 who elected to take stock in
payment of the distribution from 2003 capital gain and investment income.
The Corporation may purchase shares of its Common Stock from time to time at
such prices and amounts as the Board of Directors may deem advisable.
Transactions in Common Stock for 2003 and 2002 were as follows:
Shares Amount
------------------ ------------------------
2003 2002 2003 2002
-------- -------- ----------- -----------
Shares issued in payment
of distributions 450,110 521,854 $ 9,783,141 $ 9,954,365
Shares purchased
(at an average discount
from net asset value of
8.2% and 8.9%,
respectively) (223,400) (159,350) (4,393,315) (3,097,181)
----------------------------------------------------------------------
Net change 226,710 362,504 $ 5,389,826 $ 6,857,184
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9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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The cost of the 14,900 shares of Common Stock held by the Corporation at
December 31, 2002 amounted to $285,217. There were no shares held at December
31, 2003.
The Corporation has an employee incentive stock option and stock appreciation
rights plan which provides for the issuance of options and stock appreciation
rights for the purchase of up to 895,522 shares of the Corporation's Common
Stock at 100% of the fair market value at date of grant. Options are
exercisable beginning not less than one year after the date of grant and extend
and vest over ten years from the date of grant. Stock appreciation rights are
exercisable beginning not less than two years after the date of grant and
extend over the period during which the option is exercisable. The stock
appreciation rights allow the holders to surrender their rights to exercise
their options and receive cash or shares in an amount equal to the difference
between the option price and the fair market value of the common stock at the
date of surrender.
Under the plan, the exercise price of the options and related stock
appreciation rights is reduced by the per share amount of capital gain paid by
the Corporation during subsequent years. At the beginning of 2003, there were
152,012 options outstanding with a weighted average exercise price of $18.07
per share. During 2003, the Corporation granted options, including stock
appreciation rights, for 21,258 shares of common stock with an exercise price
of $19.29 per share. During the year, stock appreciation rights relating to
17,880 stock option shares were exercised at a weighted average market price of
$20.24 per share and the stock options relating to these rights which had a
weighted average exercise price of $10.21 per share were cancelled. In
addition, stock options and stock appreciation rights relating to 25,943
shares, and with a weighted average exercise price of $19.46 per share, were
cancelled. At December 31, 2003, there were 38,866 outstanding exercisable
options to purchase common shares at $8.31-$24.53 per share (weighted average
price of $18.05) and unexercisable options to purchase 90,581 common shares at
$10.92-$24.53 per share (weighted average price of $18.48). The weighted
average remaining contractual life of outstanding exercisable and unexercisable
options was 5.17 years and 6.18 years, respectively. The total compensation
expense recognized in 2003 for the stock option and stock appreciation rights
plan was $367,322. At December 31, 2003, there were 279,614 shares available
for future option grants.
5. RETIREMENT PLANS
The Corporation provides retirement benefits for its employees under a
non-contributory qualified defined benefit pension plan. The benefits are based
on years of service and compensation during the last five years of employment.
The Corporation's current funding policy is to contribute annually to the plan
only those amounts that can be deducted for federal income tax purposes. As of
December 31, 2003, the plan assets consisted of investments in Adams Express
Co. stock (7%), other individual stocks (60%), and mutual funds (33%).
The actuarially computed net pension cost for the year ended December 31, 2003
was $807,407, and consisted of service cost of $122,531, interest cost of
$234,808, expected return on plan assets of $235,114, net amortization expense
of $218,077, and loss on settlement of $467,105, due to lump-sum distributions.
In determining the actuarial present value of the projected benefit obligation,
the interest rate used for the weighted average discount rate was 6.75%, the
expected rate of annual salary increases was 7.0%, and the expected long-term
rate of return on plan assets was 8.0%.
On January 1, 2003, the projected benefit obligation for service rendered to
date was $4,149,034. During 2003, the projected benefit obligation increased
due to service cost and interest cost of $122,531 and $234,808, respectively,
and decreased due to benefits paid in the amount of $88,577 and the effect of a
settlement of $857,753. The projected benefit obligation at December 31, 2003
was $3,560,043.
On January 1, 2003, the fair value of plan assets was $3,861,986. During 2003,
the fair value of plan assets increased due to the expected return on plan
assets of $235,114 and decreased due to benefits paid in the amount of $88,577
and the effect of a settlement of $1,171,699. At December 31, 2003, the fair
value of plan assets amounted to $2,836,824, which resulted in a deficit in
plan assets of $723,219. The remaining components of prepaid pension cost at
December 31, 2003 included $1,230,167 in unrecognized loss and $224,073 in
unrecognized prior service cost. Prepaid pension cost included in other assets
at December 31, 2003 was $731,021.
In addition, the Corporation has a nonqualified benefit plan which provides
employees with defined retirement benefits to supplement the qualified plan.
The Corporation does not provide postretirement medical benefits.
6. EXPENSES
The cumulative amount of accrued expenses at December 31, 2003 for employees
and former employees of the Corporation was $1,443,431. Aggregate remuneration
paid or accrued during the year ended December 31, 2003 to key employees and
directors amounted to $1,364,126.
7. PORTFOLIO SECURITIES LOANED
The Corporation makes loans of securities to brokers, secured by cash deposits,
U.S. Government securities, or bank letters of credit. The Corporation accounts
for securities lending transactions as secured financing and receives
compensation in the form of fees or retains a portion of interest on the
investment of any cash received as collateral. The Corporation also continues
to receive interest or dividends on the securities loaned. The loans are
secured by collateral of at least 102%, at all times, of the fair value of the
securities loaned plus accrued interest. Gain or loss in the fair value of
securities loaned that may occur during the term of the loan will be for the
account of the Corporation. At December 31, 2003, the Corporation had
securities on loan of $21,860,647, and held collateral of $22,322,240,
consisting of repurchase agreements and commercial paper.
10
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------------------
Per Share Operating Performance*
Net asset value, beginning of year $20.98 $24.90 $32.69 $26.32 $22.87
----------------------------------------------------------------------------------------------------
Net investment income 0.38 0.42 0.49 0.37 0.48
Net realized gains and change in
unrealized appreciation 3.89 (3.20) (6.81) 7.67 4.67
----------------------------------------------------------------------------------------------------
Total from investment operations 4.27 (2.78) (6.32) 8.04 5.15
----------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.38) (0.43) (0.43) (0.39) (0.48)
Distributions from net realized gains (0.81) (0.68) (1.07) (1.35) (1.07)
----------------------------------------------------------------------------------------------------
Total distributions (1.19) (1.11) (1.50) (1.74) (1.55)
----------------------------------------------------------------------------------------------------
Capital share repurchases 0.02 0.01 0.06 0.28 0.01
Reinvestment of distributions (0.02) (0.04) (0.03) (0.21) (0.16)
----------------------------------------------------------------------------------------------------
Total capital share transactions 0.00 (0.03) 0.03 0.07 (0.15)
----------------------------------------------------------------------------------------------------
Net asset value, end of year $24.06 $20.98 $24.90 $32.69 $26.32
----------------------------------------------------------------------------------------------------
Per share market price, end of year $23.74 $19.18 $23.46 $27.31 $21.50
----------------------------------------------------------------------------------------------------
Total Investment Return
Based on market price 30.8% (13.7)% (8.7)% 36.1% 13.3%
Based on net asset value 21.2% (11.1)% (19.0)% 33.1% 23.8%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $522,941 $451,275 $526,492 $688,173 $565,075
Ratio of expenses to average net assets 0.74% 0.49% 0.35% 0.59% 0.43%
Ratio of net investment income to average net assets 1.75% 1.84% 1.67% 1.24% 1.86%
Portfolio turnover 10.20% 9.69% 6.74% 7.68% 11.89%
Number of shares outstanding at end of year
(in 000's)* 21,737 21,510 21,148 21,054 21,471
----------------------------------------------------------------------------------------------------
* Adjusted to reflect the 3-for-2 stock split effected in October 2000. Certain
prior year amounts have been reclassified to conform to current year
presentation.
11
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
December 31, 2003
Shares Value (A)
-----------------------------------------------------------------------------------
Stocks and Convertible Securities -- 87.9%
Energy -- 74.8%
Internationals -- 27.9%
BP plc ADR............................................ 540,000 $ 26,649,000
ChevronTexaco Corp.................................... 290,000 25,053,100
Exxon Mobil Corp...................................... 1,050,000 43,050,000
Royal Dutch Petroleum Co.............................. 600,000 31,434,000
"Shell" Transport and Trading Co., plc ADR (B)........ 150,000 6,754,500
Total S.A. ADR (B).................................... 140,000 12,951,400
------------
145,892,000
------------
Domestics -- 7.7%
Amerada Hess Corp..................................... 125,000 6,646,250
ConocoPhillips........................................ 260,000 17,048,200
Kerr-McGee Corp....................................... 177,153 8,235,843
Murphy Oil Corp....................................... 65,000 4,245,150
Unocal Capital Trust $3.125 Conv. Pfd................. 72,540 3,799,283
------------
39,974,726
------------
Producers -- 12.4%
Apache Corp........................................... 105,000 8,515,500
Burlington Resources, Inc............................. 133,400 7,387,692
Devon Energy Corp..................................... 198,720 11,378,707
EOG Resources, Inc.................................... 200,000 9,234,000
Noble Energy, Inc..................................... 141,000 6,264,630
Occidental Petroleum Corp............................. 200,000 8,448,000
Pioneer Natural Resources Co. (C)..................... 291,000 9,291,630
Stone Energy Corp. (C)................................ 104,300 4,427,535
------------
64,947,694
------------
Distributors -- 15.5%
AGL Resources Inc..................................... 250,000 7,275,000
Duke Energy Corp. 8.25% Conv. Pfd. due 2004 (B)....... 160,000 2,214,400
Duke Energy Corp. (B)................................. 115,000 2,351,750
El Paso Corp. (B)..................................... 180,000 1,474,200
Energen Corp.......................................... 200,000 8,206,000
Equitable Resources Inc............................... 250,000 10,730,000
Keyspan Corp.......................................... 220,000 8,096,000
Kinder Morgan, Inc.................................... 77,300 4,568,430
MDU Resources Group, Inc.............................. 300,000 7,143,000
National Fuel Gas Co.................................. 200,000 4,888,000
New Jersey Resources Corp............................. 277,500 10,686,525
Questar Corp.......................................... 200,000 7,030,000
TECO Energy, Inc. (B)................................. 200,000 2,882,000
Williams Companies, Inc. 9.0% FELINE PACS due 2005.... 120,000 1,573,200
Williams Companies, Inc. (B).......................... 200,000 1,964,000
------------
81,082,505
------------
12
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2003
Shares Value (A)
----------------------------------------------------------------------
Services -- 11.3%
Baker Hughes, Inc......................... 130,000 $ 4,180,800
BJ Services Co. (C)....................... 370,000 13,283,000
GlobalSantaFe Corp. (B)................... 200,000 4,966,000
Grant Prideco Inc. (C).................... 308,000 4,010,160
Nabors Industries Ltd. (C)................ 125,000 5,187,500
Noble Corp. (C)........................... 135,000 4,830,300
Schlumberger Ltd.......................... 280,000 15,321,600
Weatherford International, Ltd. (C)....... 205,000 7,380,000
-------------
59,159,360
-------------
Basic Industries -- 13.1%
Basic Materials & Other -- 9.9%
Air Products and Chemicals, Inc........... 75,000 3,962,250
Albemarle Corp............................ 200,000 5,994,000
Arch Coal Inc............................. 250,000 7,792,500
General Electric Co....................... 329,800 10,217,204
Ingersoll-Rand Co. Ltd.................... 100,000 6,788,000
Philadelphia Suburban Corp................ 381,250 8,425,625
Rohm & Haas Co............................ 200,000 8,542,000
-------------
51,721,579
-------------
Paper and Forest Products -- 3.2%
Boise Cascade Corp. 7.5% ACES due 2004.... 51,000 2,610,690
Boise Cascade Corp. (B)................... 205,000 6,736,300
Temple-Inland Inc......................... 120,000 7,520,400
-------------
16,867,390
-------------
Total Stocks and Convertible Securities
(Cost $274,472,378 ) (D)...................... $ 459,645,254
-------------
13
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2003
Prin. Amt. Value (A)
---------------------------------------------------------------------------------------------
Short-Term Investments -- 12.2%
U.S. Government Obligations -- 1.4%
U.S. Treasury Bills, 0.78-0.91%, due 2/19/04.................... $7,420,000 $ 7,410,979
------------
Commercial Paper -- 10.8%
American General Finance, Inc., 1.04-1.06%, due 1/6/04-1/22/04.. 5,000,000 4,998,663
Cargill, Inc., 0.99-1.00%, due 1/8/04-2/12/04................... 5,000,000 4,997,670
Caterpillar Financial Services Corp., 1.02%, due 1/13/04........ 5,000,000 4,998,300
ChevronTexaco Funding Corp., 1.02%, due 1/13/04................. 2,500,000 2,499,150
Coca-Cola Co., 0.99%, due 1/22/04............................... 1,750,000 1,748,989
Exxon Project Investment Corp., 0.96%, due 1/6/04............... 4,975,000 4,974,337
General Electric Capital Corp., 1.03%, due 1/26/04-2/3/04....... 5,000,000 4,995,571
GMAC MINT, 1.08%, due 1/20/04................................... 3,600,000 3,597,948
International Business Machines Corp., 0.98%, due 1/7/04........ 4,700,000 4,699,232
Nestle Capital Corp., 0.99%, due 1/15/04........................ 4,055,000 4,053,439
Pfizer Inc., 1.00%, due 1/27/04................................. 5,000,000 4,996,389
Toyota Motor Credit Corp., 1.02-1.04%, due 1/20/04-1/27/04...... 5,000,000 4,996,797
Unilever Capital Corp., 0.99%, due 1/6/04-1/29/04............... 5,000,000 4,997,099
------------
56,553,584
------------
Total Short-Term Investments
(Cost $63,964,563)................................................ 63,964,563
------------
Securities Lending Collateral -- 4.3%
Repurchase Agreements
Commerz Capital, 1.02%, due 1/2/04.............................. 18,322,918
JP Morgan Securities, 1.06%, due 1/2/04......................... 2,000,178
Commercial Paper
Atlantic Asset Securitization, 1.10%, due 1/14/04............... 999,572
Starbird Funding, 1.07%, due 2/13/04............................ 999,572
------------
Total Securities Lending Collateral
(Cost $22,322,240)................................................ 22,322,240
------------
Total Investments -- 104.4%
(Cost $360,759,181)............................................... 545,932,057
Cash, receivables and other assets, less liabilities -- (4.4)%.. (22,990,778)
------------
Net Assets -- 100%.................................................. $522,941,279
--------------------------------------------------------------------------------
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) All or a portion of these securities are on loan. See Note 7 to Financial
Statements.
(C) Presently non-dividend paying.
(D) The aggregate market value of stocks held in escrow at December 31, 2003
covering open call option contracts written was $3,020,850. In addition,
the required aggregate market value of securities segregated by the
custodian to collaterize open put option contracts written was $1,550,000.
-------------------------
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.
14
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
--------------------------------------------------------------------------------
December 31, 2003
Contracts Contract
(100 shares Strike Expiration Appreciation/
each) Security Price Date (Depreciation)
------------------------------------------------------------------------------
COVERED CALLS
100.... Apache Corp..................... $75 Jan 04 $ (53,301)
100 Ingersoll-Rand Corp............. 65 Jan 04 (24,915)
100 Kinder Morgan, Inc.............. 60 May 04 (11,801)
150 Temple-Inland Inc............... 60 Feb 04 (28,551)
--- ----------
450 (118,568)
--- ----------
COLLATERALIZED PUTS
150 Air Products and Chemicals, Inc. 50 Mar 04 243
200 Burlington Resources, Inc....... 40 Feb 04 17,999
--- ----------
350 18,242
--- ----------
$(100,326)
==========
-------------------------
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.
15
CHANGES IN PORTFOLIO SECURITIES
--------------------------------------------------------------------------------
During the Three Months Ended December 31, 2003
(unaudited)
Shares
--------------------------------------
Held
Additions Reductions Dec. 31, 2003
-----------------------------------------------------------------------
AGL Resources Inc............... 90,000 250,000
Air Products and Chemicals, Inc. 75,000 75,000
Amerada Hess Corp............... 75,000 125,000
BP plc ADR...................... 40,000 540,000
ConocoPhillips.................. 60,000 260,000
MDU Resources Group, Inc........ 100,000 300,000
Noble Energy, Inc............... 16,000 141,000
Philadelphia Suburban Corp...... 76,250/(1)/ 381,250
Pioneer Natural Resources Co.... 60,000 291,000
Apache Corp..................... 15,000 105,000
Atmos Energy Corp............... 40,000 --
BJ Services Co.................. 10,000 370,000
ChevronTexaco Corp.............. 10,000 290,000
El Paso Corp.................... 30,000 180,000
Kinder Morgan, Inc.............. 72,700 77,300
MeadWestvaco Corp............... 60,000 --
Murphy Oil Corp................. 22,500 65,000
Questar Corp.................... 55,000 200,000
Unocal Corp..................... 150,000 --
--------
/(1)/By stock split.
-------------------------
Proxy Voting Policies
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 is available to stockholders (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 "Proxy Voting Guidelines" at the bottom of
any page on the website; and (iii) on the Securities and Exchange Commission's
website at http://www.sec.gov.
16
REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
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, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Corporation's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian and brokers provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 8, 2004
-------------------------
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 Auditors: PricewaterhouseCoopers LLP
Transfer Agent & Registrar: American Stock Transfer & Trust Co.
Custodian of Securities: The Bank of New York
17
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 19).
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, usually 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 dividend and capital gain
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
19.
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.
18
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 $7.50
Book to Book Transfers Included
To transfer shares to another participant or to a new participant
Fees are subject to change at any time.
Minimum and Maximum Cash Investments
Initial minimum investment (non-holders) $500.00
Minimum optional investment
(existing holders) $50.00
Electronic Funds Transfer
(monthly minimum) $50.00
Maximum per transaction $25,000.00
Maximum per year NONE
A brochure which further details the benefits and features of INVESTORS CHOICE
as well as an enrollment form may be obtained by contacting AST.
For Non-Registered Shareholders
For shareholders whose stock is held by a broker in "street" name, the AST
INVESTORS CHOICE Direct Stock Purchase and Sale Plan remains available through
many registered investment security dealers. If your shares are currently held
in a "street" name or brokerage account, please contact your broker for details
about how you can participate in AST's Plan or contact AST.
----------
The Corporation
Petroleum & Resources Corporation
Lawrence L. Hooper, Jr.
Vice President, General Counsel and Secretary
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(800) 638-2479
Website: www.peteres.com
E-mail: contact@peteres.com
The Transfer Agent
American Stock Transfer & Trust Company
Address Shareholder Inquiries to:
Shareholder Relations Department
59 Maiden Lane
New York, NY 10038
(866) 723-8330
Website: www.amstock.com
E-mail: info@amstock.com
Investors Choice Mailing Address:
Attention: Dividend Reinvestment
P.O. Box 922
Wall Street Station
New York, NY 10269
Website: www.InvestPower.com
E-mail: info@InvestPower.com
*The year-end dividend and capital gain distribution will usually be made in
newly issued shares of common stock. There will be no fees or commissions in
connection with this dividend and capital gain distribution when made in newly
issued shares.
19
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*
---------------------------------------------------------------------
1989 $322,866,019 15,576,900 $16.56 $.61 $ .80
1990 308,599,851 16,189,934 19.06 .73 .83
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
--------
*Adjusted for 3-for-2 stock split effected in October 2000.
-------------------------
PETROLEUM & RESOURCES CORPORATION
PRIVACY POLICY
In order to conduct its business, Petroleum & Resources Corporation collects
and maintains certain nonpublic personal information about our stockholders of
record with respect to their transactions in shares of our securities. This
information includes the stockholder's address, tax identification or Social
Security number, share balances, and dividend elections. We do not collect or
maintain personal information about stockholders whose shares of our securities
are held in "street name" by a financial institution such as a bank or broker.
We do not disclose any nonpublic personal information about you, our other
stockholders or our former stockholders to third parties unless necessary to
process a transaction, service an account or as otherwise permitted by law.
To protect your personal information internally, we restrict access to
nonpublic personal information about our stockholders to those employees who
need to know that information to provide services to our stockholders. We also
maintain certain other safeguards to protect your nonpublic personal
information.
20
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 (8 funds) (investment
Age 62 Business, Columbia University. companies).
-------------------------------------------------------------------------------------------------------------------------------
Phyllis O. Bonanno Director One Since President & CEO of Two Director of The Adams
7 St. Paul Street, Year Nov. International Trade Solutions, Express Company
Suite 1140 2003 Inc. (consultants). Formerly (investment company), Borg-
Baltimore, MD 21202 President of Columbia College, Warner Inc. (industrial), The
Age 60 Columbia, South Carolina, and Canadian-American Business
Vice President of Warnaco Inc. Council, and Board of
(apparel). Advisors for APTE, Inc.
(software).
-------------------------------------------------------------------------------------------------------------------------------
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 79 (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.
-------------------------------------------------------------------------------------------------------------------------------
Edward J. Kelly, III, J.D. Director One Since President and Chief Executive Two Director of The Adams
7 St. Paul Street, Year 2001 Officer of Mercantile Express Company
Suite 1140 Bankshares Corporation. (investment company), AXIS
Baltimore, MD 21202 Formerly Managing Director Specialty Limited (insurance),
Age 50 with J.P. Morgan Chase & Co. Hartford Financial Services
(investment bank and global Group, Constellation Energy
financial institution). Group, CIT Group
(commercial finance), and
CSX Corp. (transportation);
and member of Board of
Trustees of Johns Hopkins
University.
-------------------------------------------------------------------------------------------------------------------------------
Thomas H. Lenagh Director One Since Financial Advisor, Chairman of Two Director of Cornerstone
7 St. Paul Street, Year 1987 the Board, Photonics Product Funds, Inc. (3 funds),
Suite 1140 Group (crystals). Formerly Investors First Fund, and The
Baltimore, MD 21202 Chairman of the Board and Adams Express Company
Age 85 CEO of Greiner Engineering (investment companies).
Inc. (formerly Systems
Planning Corp.) (consultants),
and Chief Investment Officer
of the Ford Foundation
(charitable foundation).
-------------------------------------------------------------------------------------------------------------------------------
W. D. MacCallan Director One Since Retired Chairman of the Board Two Director of The Adams
7 St. Paul Street, Year 1971 and CEO of the Corporation Express Company
Suite 1140 (since 1991) and The Adams (investment company).
Baltimore, MD 21202 Express Company (since 1991).
Age 76 Formerly consultant to the
Corporation and The Adams
Express Company.
-------------------------------------------------------------------------------------------------------------------------------
21
BOARD OF DIRECTORS (CONTINUED)
--------------------------------------------------------------------------------
Number of
Portfolios
in Fund
Position Term Length Complex
Personal Held with of of Time Principal Occupations Overseen Other
Information the Fund Office Served During the Last 5 Years by Director Directorships
---------------------------------------------------------------------------------------------------------------------------------
Independent Directors (continued)
Kathleen T. Director One Since Principal & Director of Pelham Two Director of The Adams
McGahran, Ph.D., Year Nov. Associates, Inc. (executive Express Company
J.D., C.P.A 2003 education), Adjunct Associate (investment company).
7 St. Paul Street, Professor, Columbia Executive
Suite 1140 Education, Graduate School of
Baltimore, Md 21202 Business, Columbia University.
Age 53 Formerly Associate Dean and
Director of Executive Education,
and Associate Professor, Columbia
University.
---------------------------------------------------------------------------------------------------------------------------------
W. Perry Neff, J.D. Director One Since Private Financial Consultant. Two Director of The Adams
7 St. Paul Street, Year 1971 Retired Executive Vice President of Express Company
Suite 1140 Chemical Bank. (investment company).
Baltimore, MD 21202
Age 76
---------------------------------------------------------------------------------------------------------------------------------
Landon Peters Director One Since Private Investor. Former Investment Two Director of The Adams
7 St. Paul Street, Year 1987 Manager, YMCA Retirement Fund. Express Company
Suite 1140 Formerly Executive Vice President (investment company).
Baltimore, MD and Treasurer and prior thereto Senior
21202 Vice President and Treasurer of The
Age 73 Bank of New York.
---------------------------------------------------------------------------------------------------------------------------------
John J. Roberts Director One Since Senior Advisor, formerly Vice-- Two Honorary Director of
7 St. Paul Street, Year 1987 Chairman External Affairs, American International
Suite 1140 American International Group, Inc. Group, Inc. Director of The
Baltimore, MD (insurance). Formerly Chairman and Adams Express Company
21202 CEO of American International (investment company).
Age 81 Underwriters Corporation.
Previously President of American
International Underwriters
Corporation-U.S./ Overseas
Operations.
---------------------------------------------------------------------------------------------------------------------------------
Susan C. Schwab, Ph.D. Director One Since Professor, School of Public Affairs Two Director of The Adams
7 St. Paul Street, Year 2000 at the University of Maryland, Express Company
Suite 1140 College Park. Formerly Director of (investment company) and
Baltimore, MD Corporate Business Development at Calpine Corp. (energy).
21202 Motorola, Inc. (electronics).
Age 48
---------------------------------------------------------------------------------------------------------------------------------
Robert J. M. Wilson Director One Since Retired President of the Corporation Two Director of The Adams
7 St. Paul Street, Year 1975 (since 1986) and retired President of Express Company
Suite 1140 The Adams Express Company (investment company).
Baltimore, MD (since 1986).
21202
Age 83
---------------------------------------------------------------------------------------------------------------------------------
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 and CEO Chairman
21202 of the
Age 57 Board
since
1991
---------------------------------------------------------------------------------------------------------------------------------
22
PETROLEUM & RESOURCES CORPORATION
--------------------------------------------------------------------------------
Board Of Directors
Enrique R. Arzac/(2)(4) / W. Perry Neff/(2)(4)/
Phyllis O. Bonanno/(1)/ Douglas G. Ober/(1)/
Daniel E. Emerson/(1)(3) / Landon Peters/(2)(3)/
Edward J. Kelly, John J. Roberts/(1)(2)/
III/(1)(4) /
Susan C. Schwab/(1)(3)/
Thomas H. Lenagh/(1)(4) /
Robert J.M. Wilson/(1)(3)/
W.D. MacCallan/(3)(4) /
Kathleen T. McGahran/(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
Nancy J.F. Prue Vice President -- Research
Lawrence L. Hooper, Jr. Vice President, General
Counsel and Secretary
Maureen A. Jones Vice President and Chief
Financial Officer
Christine M. Sloan Assistant Treasurer
Geraldine H. Pare Assistant Secretary
23
Petroleum & Resources Corporation
Seven St. Paul Street, Suite 1140
Baltimore, MD 21202
(410) 752-5900 or (800) 638-2479
Contact us on the Web at:
www.peteres.com
PEO
Listed
NYSE
THE NEW YORK STOCK EXCHANGE
Item 2. Code of Ethics.
On June 12, 2003, the Board of Directors adopted a code of
ethics that applies to registrants principal executive
officer and principal financial officer. The code of ethics
is available on registrants 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 registrants audit committee meets the
definition of audit committee financial expert as that term
is defined by the Securities and Exchange Commission. The
two directors on the registrants audit committee whom the
board of directors have determined meet such definition are
Enrique R. Arzac and Kathleen T. McGahran, both of whom are
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 Companys
annual and semi-annual financial statements for 2003 and
2002 were $46,162 and $38,726, respectively.
(b) Audit Related Fees. There were no audit-related fees in
2003 and 2002.
(c) Tax Fees. The aggregate fees billed to registrant for
professional services rendered by PricewaterhouseCoopers LLP
for the review of registrants excise tax calculations and
preparations of federal, state and excise tax returns for
2003 and 2002 were $7,038 and $6,824, respectively.
(d) All Other Fees. The aggregate fees billed to registrant
by PricewaterhouseCoopers LLP other than for the services
referenced above for 2003 was $0 and for 2002 was $2,250,
which related to tax research for option purchasing.
(e) (1) Audit Committee Pre-Approval Policy. As of 2003,
all services to be performed for registrant by
PricewaterhouseCoopers LLP must be pre-approved by the audit
committee. All services performed in 2003 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 2003 and 2002 were $7,038 and $9,074, respectively.
(h) The registrants 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 Registrants.
(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: Enrique R. Arzac, chairman, W. Perry Neff,
Landon Peters, John J. Roberts, and Kathleen T. McGahran.
(B) Not applicable.
Item 6. [Reserved by SEC for future use].
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 companys 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 companys
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 companys 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 companys management. When we
believe that the managements 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 managements
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 companys 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 companys 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 companys
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 companys 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. Purchases of Equity Securities by Closed-End
Management Investment Company and Affiliated Purchasers.
Form N-CSR disclosure requirement not yet effective with
respect to registrant.
Item 9. Submission of Matters to a Vote of Security Holders.
Form N-CSR disclosure requirement not yet effective with
respect to registrant.
Item 10. Controls and Procedures.
Conclusions of principal officers concerning controls and
procedures.
(a) As of February 26, 2004, 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 registrants disclosure controls and
procedures. Based on that evaluation, the registrants
officers, including the PEO and PFO, concluded that, as of
February 26, 2004, the registrants 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
registrants 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
registrants last fiscal half-year that has materially
affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting.
Item 11. Exhibits.
(a)(1) As indicated in Item 2, the code of ethics is
posted on the registrants website.
(2) The certifications of the PEO and PFO pursuant to
Rule 30a-2(a) under the Investment Company Act of 1940 are
attached hereto as Exhibit 99 CERT.
(c) The certifications of the PEO and PFO pursuant to Rule
30a-2(b) under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.906 CERT.
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, having been duly authorized to do
so.
Petroleum & Resources Corporation
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer and President
(Principal Executive Officer)
Date: February 27, 2004
Pursuant to the requirements of the Securities Exchange
Act of 1934 and the Investment Company Act of 1940, this
report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the
dates indicated.
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer and President
(Principal Executive Officer)
Date: February 27, 2004
BY: /s/ Maureen A. Jones
-----------------------
Maureen A. Jones
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: February 27, 2004