Petroleum & Resources Corporation (PEO-NYSE)

CEOCFO-Members Login

July 9, 2012 Issue

The Most Powerful Name In Corporate News and Information

CURRENT ISSUE |  COVER ARCHIVES  |  INDEX  |  CONTACT  |  FINANCIALS |  SERVICES  | HOME PAGE

With their Conservatively Managed Equity Investment Fund Focused on the Energy and Natural Resources Sector, Petroleum & Resources Corporation is Providing Investors with the Opportunity to Buy Energy Stocks at 13% Less than Market Value in Aggregate

Douglas G. Ober
Chief Executive Officer
Mr. Ober has been director of Petroleum & Resources Corporation since 1989 and Chairman of the Board since 1991. Over the last 5 years, Mr. Ober has held positions as Chairman & CEO of the Corporation and The Adams Express Company. He has also held directorship in The Adams Express Company.

Company Profile:

Petroleum & Resources Corporation is an equity investment fund for investors who seek a broadly diversified exposure to the energy and natural resources sector in a conservatively-managed fund.

The portfolio is managed with the expectation that it will generate solid returns that compare favorably to the returns of the Fund's benchmarks. Investments are made with an eye towards protecting your original investment and generating dividends and capital gains that can be used as a source of income or reinvested to increase your holdings in the Fund.

Trading on the New York Stock Exchange since January 1929, Petroleum & Resources has paid dividends continuously since 1934.

Financial
Closed-End Fund - Equity
(PEO-NYSE)

Petroleum & Resources Corporation
Seven Saint Paul Street, Suite 1140
Baltimore, MD 21202
Phone: 410-752-5900
www.peteres.com
 

Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published - July 2012

CEOCFO: Mr. Ober, what is the philosophy and focus of Petroleum & Resources today?

Mr. Ober: Petroleum & Resources is a closed end investment company, investing primarily in the stocks of energy companies and basic materials companies. Our fund is a conservative relatively low-risk fund that seeks to match or meet what we consider our bench-mark returns, and do that taking on less risk.

CEOCFO: What is the strategy as far as the companies you choose to have in the fund or is it opportunistic?

Mr. Ober: It is very much opportunistic. We have a group of research analysts that do research on individual companies within the entire spectrum of the energy area and the basic materials area. They make individual recommendations to the portfolio management team taking into account our general view of what the domestic and world economies are expected to look like over the next two to three to five years. Because this is a closed-end fund we are able to take a significantly longer term perspective than an open-ended fund might be able to. We are really thinking in terms of owning a stock for a five-year time frame, and are very much interested in what the managements think about their industry and their future. Our research analysts go into all of that as well as doing industry studies themselves to arrive at recommendations to us that they believe will do as well as or better than the indexes that we tend to track.

In the individual segments, if you segment the portfolio, we are invested roughly 80% in energy and 20% in basic materials. However, there is not any specific hard and fast guideline. If we believe that the energy area will outperform the basic materials area, we would tend to lean the portfolio in that direction and vice versa.

CEOCFO: Given the volatility in the world economy as well as the energy sector, what is most important when you think about what might be five years from now, and what kinds of things do you look at that others might not consider?

Mr. Ober: From a general standpoint, our interests are in terms of what sources of energy will be the most predominant over the next five-year time frame. We think there are some major shifts going on these days. You see a lot more pressure from governments around the world to reduce the amount of coal that is being burned. Given the fact that we do not seem to be able to reduce the amount of electricity that we use, somehow that electricity has to be generated. We have seen the impact from a tsunami and after-effects of that in Japan. They have shut down their entire nuclear power industry and there are several countries in Europe that have or are in the process of doing the same, so we see a movement generally away from nuclear in some areas of the world whereas other areas continue to build. China is still continuing to build reactors as fast as it can, and we are seeing some shifts there. We have seen a great amount of additional natural gas being produced in this part of the world and we are seeing some transitioning of electric power generation from coal to natural gas and other alternative fuels as well. How it is best to invest with that kind of trend in mind is one of the things that we look at. As far as individual companies are concerned we are looking at what their exploration activities are doing if they are exploration companies, and there are some in the portfolio that are not. How they are doing relative to history as far as increasing the amount of reserves that they have ownership of, increasing the amount of production that they are doing in terms of producing oil or gas or in the case of materials copper or fertilizer is what is going to dictate over the longer term how well the company is going to do.

CEOCFO: How do you equate the hard facts with you and your team’s experience and gut-feeling, and how do you put those two together to get it right?

Mr. Ober: I think that the gut feeling part of it comes into play most in our efforts to discern what the world economy is going to do. We tend to look at things on a very fundamental basis in terms of population growth, use of materials, and increases in the use of electricity. Just look at China for instance. Over the last four or five years where growth has slowed from 14-15% down to 7-8% range today, we could not have predicted that four years ago. We recognize that it would have to slow down at some point but we didn’t know how far or how quickly. In our guts and in our minds we have to take some point of view as far as that goes. Hard facts are looking at what production is today, what companies are investing in today for the future.

CEOCFO: How important is it for people looking at your fund that you have had an exceedingly long history?

Mr. Ober: It depends a great deal on the investor. A great many of our investors have been and continue to be holders of the stock for a long period of time, they are invested in Petroleum & Resources for the long term. They believe that a diversified holding reflecting energy and natural resources is a great opportunity for them to get a great total return over time. There are other investors who are interested in seeing a potential rise in the price of oil or gas or materials over the next three months. They will say, “I need exposure to that very quickly”. They will buy Petroleum & Resources, hold onto it for three or six months, decide that they think the run is over, and they will sell the stock. Therefore, we have short term investors and long term investors. The vast majority of our investors are longer term investors because they recognize that they cannot get as much bang for their buck in the short term owning a diversified portfolio. However, if they invest in a single stock or two or three stocks, they are particularly exposed to a particular area.

CEOCFO: What are some of your main holdings today and what might you be holding that people would be surprised to find in the portfolio?
Mr. Ober: As of March 31^st, our largest holding is Exxon Mobil, our second largest is Chevron Corporation, and they comprise about twenty-seven percent of the portfolio, followed by Schlumberger, Occidental Petroleum, ConocoPhillips, Anadarko, National Oilwell Varco, Dow Chemical, Noble Energy and Freeport-McMoRan Copper & Gold. Together, those top ten comprise a little more than half of the total net assets of the fund. Given the relative size of these companies it is no surprise. If you look at the indices that we look at, the Dow Jones Oil and Gas Index or the S&P 500 for that matter, the relative weightings of these large companies tends to be very high. Given that our investors are looking to do as well as or better than these indexes, we have to be aware of how heavily weighted Exxon is in the index. As far as names that people might be surprised at, I would say a company like Oil States International, which is more than anything else a producer and supplier of housing to the oil industry and is one of the largest owners of oilfield camps. They are very active in the exploration area referred to as the Bakken in North Dakota. The huge migration of people to that area of the country has resulted in a dearth of housing available and Oil States is able to supply that housing to them. They also have a large operation in Australia which they recently acquired a sizable piece of another company. This is doing the same thing for the mining industry in Australia, not an oil company. They do have an oil service business that is significantly smaller than their housing business. Another company that might be surprising is Molycorp, which is a United States producer of rare earth oxides. Rare earths are used in the manufacture of wind turbines and of automobile batteries for electric power to automobiles so they are one of our significant exposures to the alternative energy area, but through the back door because they don’t make wind turbines or electric cars. They make and produce a natural resource that is used in manufacturing. Molycorp is one of the few producers of rare earths outside of China, China produces about 90% of the world’s rare earth oxides and they have been very restrictive in the export so we feel that Molycorp has an interesting future to it.

CEOCFO: What do you see in the alternative energy areas that in general would be of interest for you?

Mr. Ober: We watch the sector very closely, as we think that biofuel is an interesting area. We believe that solar energy has some interesting possibilities as does wind energy, but the problem is making money at those. The solar industry in the world has survived on the basis of tax credits. You saw an industry come alive in Spain about eight to ten years ago because there were massive tax credits available to companies that produced solar panels. Three years ago Spain cut those tax subsidies and tax credits to nearly nothing and the entire Spanish industry is gone because they have all filed for bankruptcy. There are a group of Chinese companies that produce solar panels at a very low cost and have managed to practically wipe out the industry in this country because we cannot produce solar panels at the price that the Chinese are willing to sell them.  Much of that is a function of tax credits. The same is true of the wind energy industry. We own General Electric Company, which up until very recently was the largest manufacturer of wind turbines, so we have somewhat of a play but it is a relatively small part of GE. Creating wind farms is not a profitable business in and of itself. You can produce electricity much more cheaply by burning coal and providing all the necessary cleaning and other equipment to take as much carbon dioxide, nitrous oxide, and heavy metals out of the coal residue as possible. While there are interesting alternatives and we have mandates in a number of states in this country to produce a certain amount of the state’s electricity by alternative means, until the price of the fossil fuels that are currently dominant goes up sufficiently, these alternatives are not attractive economically. They are going to be difficult areas to invest in and make money in.

CEOCFO: What is the financial picture like for Petroleum & Resources Corporation today?

Mr. Ober: We believe we have a portfolio that should do well in any kind of a reasonable environment for oil and gas. We recognize that there are some macro factors that may influence prices dramatically. There has been a lot of talk about the Iranian development of nuclear weapons and how Israel and the US feel about that. If there were to be an increase in the tensions with Iran and/or any military activity in Iran such as an attack by ourselves or Israel or some other country we could see the  price of oil go up to $150 a barrel very quickly. That would have a dramatic effect on all of the companies in the industry. It would not necessarily mean that they would make a whole lot more money, because crude oil is a resource that is converted into something else in order to make money, and the oil companies have to buy the crude from the world market unless they are producing it themselves, in order to make gasoline and in order make diesel fuel that they can then sell to the public. Barring some dramatic action like that, or a depression or serious recession worldwide, we believe the outlook is very good for the energy industry, we see worldwide demand for electricity only growing even in a very slow growing economy such as we have now. The price of oil has come down somewhere around ten percent now from its high fairly recently, and this will enable the US economy to be able to grow faster because consumers will have more money in their pockets since they are not spending as much on gasoline. Industrial companies that require transportation will have a lower transportation bill and we think this is helpful to the US economy while not severely impacting the oil companies.

CEOCFO: Why should investors pay attention to Petroleum & Resources Corporation today?

Mr. Ober: Petroleum & Resources is currently trading on the New York Stock Exchange at a twelve-plus percent discount to the net asset value per share. The discount last night was 12.8%, so you can buy a portfolio of energy and natural resource stocks and pay 13% less than the market value of those stocks in aggregate. That is one item that we think is particularly attractive about Petroleum & Resources. The other is the fact that we pay out a substantial distribution to our shareholders every year. We pay three quarterly distributions in the amount of 10 cents a share and then pay a large year-end distribution which is primarily capital gain. Last year our pay-out was 7.1% which we believe is very attractive, particularly in this market where you can’t make anything off of fixed income securities or in most equities. I think the S&P 500 pay-out runs about 2%, so a 7% return is pretty attractive. The five year average distribution has been 7.9%, so we have had some very good years as far as taking capital gains in Petroleum & Resources. We believe investors are interested in getting cash so these cash returns are pretty attractive and we believe that makes Petroleum particularly interesting.

We have seen a significant correction in the stock market here recently, and we think that the energy industry has not only been subject to that but has probably been taken down more so than perhaps is appropriate. We think that right now, just on the basis of the valuation of the stocks in the energy industry, that they have significant upside available to them. We think it is a good opportunity to buy energy stocks.

disclaimers

Any reproduction or further distribution of this article without the express written consent of CEOCFOinterviews.com is prohibited.

You can buy a portfolio of energy and natural resource stocks and pay 13% less than the market value of those stocks in aggregate… We think that right now, just on the basis of the valuation of the stocks in the energy industry, that they have significant upside available to them. We think it is a good opportunity to buy energy stocks. - Douglas G. Ober