Adams Natural Resources Fund (NYSE:PEO) is a closed end fund that primarily invests in energy and natural resource stocks. This fund is currently trading at a 14% discount to net asset value. This fund has been a solid performer with gains of just over 13% in the past year. I believe this fund is an ideal way to invest in some of the largest and most popular energy stocks. Plus, you can do so while owning just one fund, and get all the benefits and reduced risks that comes with the diversification that this fund provides. Let's take a closer look.
The Chart
As the chart below shows, this fund has rallied from around the $19 level earlier this year to the current share price of about $23. The 50-day moving average is $23.30 and the 200-day moving average is about $21.52.
Top Holdings
Here's a closer look at the top 3 holdings:
Exxon Mobil (XOM) represents about 19% of the portfolio, which gives this oil giant a significant weighting. Exxon Mobil pays a dividend that yields about 3.24% and this stock trades for just around 12 times earnings. This is not the most exciting stock in the oil sector, but it definitely is a sleep well at night income stock for many investors.
Chevron (CVX) is in the process of acquiring Hess Corporation (HES), which will make this oil company an even bigger player in the industry. Chevron offers a yield of about 4%, and trades for around 12 times earnings. This stock has been in a solid uptrend during 2024, and this is a stock I would continue to buy on dips. Chevron represents about 12% of the portfolio holding for PEO. Warren Buffett has been building a large stake in Chevron.
ConocoPhillips (COP) represents just over 6% of the portfolio holdings. This stock yields about 2.7%, and trades for about 13 times earnings. This company is also in acquisition mode, as it recently announced a deal to buy Marathon Oil (MRO) for $17.1 billion.
The Dividend
This fund has a variable dividend payment policy. In 2023, it paid out a total distribution of $1.35 per share which is equivalent to a yield of about 6.2%. In 2022, it paid out $1.63 per share which is equivalent to around 8.2%. These distributions are derived from dividend income it receives as well as from capital gains. Fortunately, these distributions do not represent a return of capital, which may not be sustainable. For the past five years, the distributions from PEO have ranged from 6.1% to 8.1%. It is important to note that part of the reason this fund is offering a strong distribution yield is because it is trading at a 14% discount to net asset value and this increases the returns for shareholders.
Energy Stocks Are Beneficiaries Of The AI Boom
There seem to be many people who believe that the use of electricity means green energy, but the vast majority (about 60%) of electricity is generated with fossil fuels. In fact, renewable energy such as wind, solar, and hydropower only account for about 21.4% of the electricity generated in the U.S. and nuclear is around 18.6%.
The continued growth in demand for electric vehicles and other relatively new industries such as AI and data centers are likely to keep increasing the need for energy from all sources including fossil fuels. On top of all this, consistent population growth globally and the rise of the middle class in many less developed countries are major tailwinds for the energy sector. The International Energy Agency or "IAE" has confirmed this long term demand for energy and it has forecasted for significant increases in the consumption of electricity in the coming years, it states:
"Electricity consumption from data centres, artificial intelligence (AI) and the cryptocurrency sector could double by 2026. Data centres are significant drivers of growth in electricity demand in many regions. After globally consuming an estimated 460 terawatt-hours (TWh) in 2022, data centres’ total electricity consumption could reach more than 1 000 TWh in 2026. This demand is roughly equivalent to the electricity consumption of Japan."
Potential Downside Risks
When investing in closed end funds, there is always the risk that the discount to net asset value gets even wider. This can happen if investor sentiment around a certain sector gets very negative. It can also happen in a market correction because closed end funds tend to be even more volatile due to a potential lack of liquidity, especially during market selloffs.
The energy sector is prone to cyclical highs and lows as it depends on the global economy for demand. A global recession could send oil prices plunging and take energy stocks lower. Geopolitics and OPEC also play a big part in the energy demand, as do regulations. All of these forces could impact and be potential downside risks for investors.
In Summary
I see PEO as an ideal way to invest in the energy sector and get diversification and an above average distribution yield. With long-term energy demand likely to remain strong due to population growth, a rising middle class in many emerging market economies, and from the significant power needs with AI and other new industries, I view PEO as a strong buy, especially on pullbacks.
No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Hawkinvest
Long-time stock market investor focused on strategic buying opportunities with dividend and value stocks. This investment strategy has resulted in a near 5 star rating on Tipranks.com and over 9,000 followers on Seeking Alpha. Follow me on Twitter for my latest trading ideas: @Hawkinvest1
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PEO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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