PEO: Join Saba Capital And Get Exposure To Top Energy Stocks At A Discount

seekingalpha08-26

There has been significant recent buying from closed-end fund activist Saba Capital.PEO recently implemented an 8% managed distribution policy, providing higher distributions on a quarterly basis.The ...

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Its inception date was January 1929, which was right before the Great Depression. The original name of the fund was Petroleum Corporation of America. There have been some name changes since then, and in March 2015, it was re-named to the Adams Natural Resources Fund.(Data below is sourced from the Adams Funds website unless otherwise stated.) PEO is internally managed and its last reported expense ratio was 0.65% which is one of the lowest in the closed-end fund universe. But this can vary with assets under management. If assets under management were to drop a lot, you would see the expense ratio go up. Similarly, if there is a big increase in assets under management, the expense ratio could go even lower. The fund seeks to deliver high total returns over time by capitalizing on the long-term demand for energy and materials. It invests in energy and natural resources stocks and tries to exceed its benchmark while consistently distributing dividends and capital gains to shareholders. PEO does not use any permanent leverage. But it occasionally may buy and sell options or utilize swap programs, which some may consider a form of leverage. PEO- Institutional Ownership As of June 30, 2024, institutional investors owned about 39.4% of the shares outstanding. The top institutional investor was well-known CEF activist Saba Capital Management, who owned $62.1 million at that time. The second-biggest holder was \"sister\" closed-end fund Adams Diversified Equity Fund, who owned $50.3 million. Saba Capital has steadily continued to add to their PEO holdings. On August 22, they acquired another 11,058 shares for $22.70. They are now up to 2,837,006 shares worth about $65.2 million. Source: Nasdaq, SEC Edgar PEO: New 8% Managed Distribution Policy Before this year, PEO was committed to paying annual distributions of at least 6% a year, based on a distribution policy that was adopted in 2012. But on May 24, 2024, PEO announced a new 8% annual rate managed distribution policy to provide a higher distribution rate paid more evenly on a quarterly basis. They will pay out at least 2% of NAV each quarter. The policy begins the third quarter of 2024. From the press release: Fund CEO James Haynie said, “We believe that this new Policy will be another attractive feature of the Fund, adding to its strong value proposition and further benefiting our shareholders. The strong relative returns and low expense ratio the Fund has provided will now be enhanced by a more consistent, higher level of distributions throughout the year.” Here are more details about the managed distributions from the recently published semi-annual shareholders report: \"The Fund pays distributions four times a year. Distributions under the MDP can be derived from net investment income, realized capital gains, or possibly, returns of capital, and are payable in newly issued shares of common stock, unless a shareholder specifically elects to receive cash. The Fund has committed to distribute 2% of average NAV for each quarterly distribution, with the fourth quarter distribution to be the greater of 2% of average NAV or the amount needed to satisfy minimum distribution requirements of the Internal Revenue Code for regulated investment companies. Average NAV is based on the average of the previous four quarter-end NAVs per share prior to each declaration date.  With each distribution, the Fund will issue a notice to shareholders, which will provide detailed information regarding the amount and composition of the distribution and other related information. The amounts and sources of distributions reported in the notice to shareholders are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the distributions for tax reporting purposes will depend upon the Fund’s investment experience during its fiscal year and may be subject to changes based on tax regulations. Shareholders will receive a Form 1099-DIV in January for the previous calendar year that will indicate how to report these distributions for federal income tax purposes.\" It is important to note that the distributions are payable in newly issued shares of common stock as a default, unless a shareholder specifically elects to receive cash. When new shares are issued in stock, there is some dilution to NAV because the shares are trading at a discount. As an active investor, I almost always elect the cash distribution option with closed-end funds, with a few rare exceptions when new shares can be re-invested at a discount below the market trading price (not the case with PEO). In a zero commission world, an investor can always reinvest the cash distribution back into PEO, and may find other opportunities that are better. At Fidelity, it is easy to set up your dividend reinvestment choices for every security in your portfolio. I believe that one reason the fund's Board may have introduced the new policy is because they felt some pressure from Saba Capital's increasing share ownership. In any event, this is a shareholder friendly occurrence which allows investors to recapture more of the fund's discount every year. Because of the new 8% managed distribution policy, the average discount to NAV has already started to come down a bit from the 5-year average of -14.5% to the current level of about -13.4%. On July 19, 2024, The Board declared a quarterly distribution of $0.54 payable on August 30, 2024. Because of the fund's discount, this is an annual distribution yield of about 9.50%. Top Ten Holdings - June 30, 2024   PEO- Top 10 Holdings (Adams Fund website)Fund Performance PEO has had decent long-term performance compared to its benchmark, and usually ranks in the top half of its equity energy peer group. Here is the total return NAV and price performance record of PEO since 2014 compared to its Equity Energy peers.     PEO NAV Performance PEO Price Performance Equity Energy NAV Rank in Category (NAV)   2014 -9.29% -6.76% -18.28% 20   2015 -20.27% -20.39% -36.20% 1   2016 +21.75% +20.57% +30.70% 100   2017 + 2.13% + 4.65% - 1.65% 40   2018 -19.40% -21.39% -23.38% 50   2019 +12.55% +21.01% + 4.12% 25   2020 -22.69% -26.37% -29.51% 34   2021 +46.82% +53.93% +38.44% 34   2022 +42.93% +41.80% +31.89% 34   2023 + 1.35% + 0.86% + 0.41% 67   YTD +10.27% +15.14% +12.17% 50   Click to enlarge Source: Morningstar (as of August 23, 2024) \"Discount\" Alpha is Generated by High Discount + Distributions The annual distribution rate of 9.5% along with the 13.4% discount allows investors to recover a portion of the discount whenever a distribution is paid out. Whenever you recover NAV from a fund selling at a 13.4% discount, the percentage return is 1.00/ 0.866 or about 15.5%. So the alpha generated by the 9.5% distribution is computed as: (0.095)*(0.155)=0.0147 or about 1.47% a year in discount capture alpha. The discount alpha is more than the fund's 0.65% expense ratio, so you essentially have a negative expense ratio for a well-managed energy fund. Share Repurchase Plan Not Currently Active On December 14, 2020, the Fund announced a share repurchase plan in order to manage the discount and enhance liquidity. Under the program, share repurchases may be made in the open market when the shares have traded at a discount of 15% or more for at least 30 consecutive days. The enhanced program also provides that the Fund will engage in a proportional tender offer to repurchase shares when the discount exceeds 19% for 30 consecutive trading days, not to exceed one such offer in any twelve-month period. Because the discount has narrowed considerably recently, the share repurchase plan is not currently active. Discount History Here is the five-year discount history for PEO from CEFConnect. The discount has narrowed quite a bit over the last six months or so. This is probably because of buying from Saba Capital, and because of the new shareholder friendly 8% managed NAV distribution policy.   PEO Discount History (CEFConnect)Asset Correlation Analysis The BlackRock Energy & Resources Trust (BGR) is the closest CEF peer to PEO. Below are some asset correlation numbers comparing PEO with BGR, the XLE Energy ETF and a few other non-energy benchmarks for the time period 2005-2024: Correlation with (BGR)= 91% Peer CEF Correlation with (XLE)= 88% Peer ETF Correlation with (SPY)= 70% S&P 500 Correlation with (QQQ)= 54% Nasdaq 100 Correlation with (TLT)= -31% 20 Year Treasury Source: portfoliovisualizer.com Note that PEO has been negatively correlated with TLT over the measurement period. The long term annualized returns for the 20-year measurement period have been: 7.08% for PEO, 5.00% for BGR and 7.84% for XLE. Over the very long term, the lower expense ratio for XLE led to the highest total return performance. But for more active CEF traders, there have been opportunities to trade both PEO and BGR based on their discounts to NAV, which could have added to their total return performance. Three-Year Total Return Comparison- PEO Versus BGR Data by YCharts Adams Natural Resources Fund (PEO) Pays managed quarterly distributions  Total Common Assets= $668 Million Last Quarterly Distribution= $0.54 Annual Distribution= $2.16 Annual Distribution (Market) Rate= 9.50% Fund Expense ratio= 0.65% Discount to NAV= -13.40% Portfolio Turnover rate in 2023= 19.8% Average Daily Volume= 42,000 Average Daily Dollar Volume= $965,000 Leverage= None  Sources: CEFConnect, Yahoo Finance Summary PEO can be an excellent way to invest in some of the highest quality energy stocks, with over a 9% distribution yield and a significant discount to NAV. The AI boom and bitcoin mining have caused an increase in power needs, which should be a tailwind for the energy sector going forward. Saba Capital, the well-known CEF activist, has been steadily accumulating PEO. At some point, I would not be surprised if there was a tender offer close to NAV for PEO. Recently, there was a 10% tender offer for \"sister\" fund ADX at 98% NAV. ADX has also been heavily accumulated by Saba Capital.  PEO is fairly liquid, but the bid-asked spread is often around six cents and can jump to ten cents or more at times. Because of this, I would recommend using only limit orders and splitting up larger orders into multiple smaller trades. Because Saba Capital may still be adding to his PEO position, I would recommend buying PEO on pullbacks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462390819"}