PEO- Petroleum and Resources Corp (CE Fund)

[wawallace]

Justification- I know this section is normally reserved for individual equities, or other primary investments; however, there are very special cases where closed-end funds may offer even more compelling value than the underlying holdings, due to their ability to trade at a discount to NAV. This is backed-up by Graham, who said (I paraphrase): you can hardly go wrong buying investment companies at a discount; and by Seth Klarman, who felt compelled to include an entire chapter on closed-end funds in his book "Margin of Safety". With that said:

 

Petroleum and Resources (PEO) is a closed-end investment company that was formed on January 1, 1929. Pretty good timing, I'd say. In addition, the fund has paid a dividend consistently since 1934. Currently, there is a 6% managed distribution rate based on 12 month trailing NAV, which can be re-invested in the funds DRIP program, or through your broker. The fund maintains a concentrated position and XOM ($13.92), CVX (9.88%) and SLB comprise (6.72%) 30% of the portfolio the entire portfolio consists of 40 holdings and turnover for the past 12 months has been 18%.

 

The fund uses minimal leverage (less than 2%, so most likely just accounts payable) and holds minimal cash at less than 1%. Currently the shares are available at a 14.74% discount to NAV. Total expense ratio is .75% , and distribution rate as a percentage of NAV for the past 12 months is 6.72% after taking into consideration the discount to NAV and the 6% of NAV managed distribution.

 

Finally, the fund has buyback in place to re-purchase up to 5% of outstanding shares. The most recent quarter's buyback was .5% of total shares outstanding.

 

The best part is, of course, oil is getting crushed. The fund is down over 15% since oil peaked at $115; the discount has remained stable during that period of time. If you want a hedge against future inflation, with a margin of safety, and taking advantage of current oil prices heading into the election this fund may be prudent, given the tendency of oil to decline heading into elections and increase thereafter.

 

Holdings:

Top Holdings

 

As of 6/30/2014 reported by Fund Sponsor

 

 

Exxon Mobil Corporation $136.77M 13.92%

 

Chevron Corp $97.02M 9.88%

 

Schlumberger NV $66.05M 6.72%

 

Halliburton Company $43.38M 4.42%

 

EOG Resources $41.84M 4.26%

 

Occidental Petroleum Corporation $41.57M 4.23%

 

Phillips 66 $34.69M 3.53%

 

LyondellBasell Industries NV $34.57M 3.52%

 

Anadarko Petroleum Corp $30.10M 3.06%

 

Noble Energy Inc $28.93M 2.95%

 

Dow Chemical Co $28.17M 2.87%

 

 

Fund website: http://www.peteres.com/

 

CEFconnect: http://www.cefconnect.com/Details/Summary.aspx?Ticker=PEO

 

If this information is not useful to anyone, just let me know and I wont post anymore CE fund ideas (there are several right now). But if this is an area of interest for anyone, let me know.

 

Thanks!

[Sullivcd]

Thanks for the idea, keep them coming!

[Picasso]

The discount on the CEF has averaged over 13% since 2005.  15% average discount since 2012. 

 

Even with the big run up in oil in 2007 this traded for a 12% discount to NAV.

 

So all else being equal if you want to own something in the oil space, wouldn't this perform almost 95% as much as an oil & gas ETF/index?

 

Edit: Since 1984 the reinvested rate of return has been 10.13% versus 1.64% for the price appreciation.  Not sure how this compares to a similar composition oil & gas index.

[wawallace]

The discount on the CEF has averaged over 13% since 2005.  15% average discount since 2012. 

 

Even with the big run up in oil in 2007 this traded for a 12% discount to NAV.

 

So all else being equal if you want to own something in the oil space, wouldn't this perform almost 95% as much as an oil & gas ETF/index?

 

Edit: Since 1984 the reinvested rate of return has been 10.13% versus 1.64% for the price appreciation.  Not sure how this compares to a similar composition oil & gas index.

 

So the discount has been expanding since 2005. It's not uncommon in these funds for the discount/premiums cycle to last multiple decades, especially one that has been around for 80+ years. My instinct is that this would be a better purchase than an ETF since your dividend rate on capital is higher by the amount of the discount. In addition, you're constantly reinvesting at a discount with NAV based dollars, which (without having done the math) I would guess accelerates compounding. In addition, the fund is buying back shares with cash in the open market at a discount, as well. A lot of your fellow shareholders are taking their funds in cash since it is an income oriented investment, which should allow you to increase your % ownership over many years without further capital.

 

If the discount continues to expand, someone will come along and try to shake it loose. I've been invested in several CEs with activist events over the past 5 years. I'd say about a 60% success rate. Of course I'm speculating here and careful analysis may prove my instincts wrong.