Aug 242015
 

How to make money in oil regardless of market conditions

Drilling for oil can be such a boring job. ? At least it provides a good income, though. But it’s becoming harder these days to find work in the oilfields. A year ago oil was trading at $90/barrel. Today, WTI has fallen below $40/barrel. Canadian crude is selling for even less, at around $30/barrel. Ouch!

15-08-crude-oil-price2015-1-year

Many oil producers are currently operating at a loss because $40/barrel is below their break-even point. It can take many years for oil prices to turn around. The problem is we don’t know exactly when the recovery will happen. If we did, we would probably all be retired right now. 🙂

15-08-break-even-price-oil-profitable-business

Oil stocks are not doing so hot these days. However, there are other ways to still make money from the oil industry, despite the bleak market conditions. 🙂 One way is to write covered calls. But today I’d like to discuss a different approach.

Since the start of this year, Western Energy Services Corp (WRG), has lost about 23% of its value. It could be worse, considering the price of crude oil has fallen about 27% over the same period. But who knows how much lower WRG shares can fall if the price of oil drops further? Fortunately, this company also issues bonds.

When Stocks Underperform, Look Towards Bonds

So last week I bought $5,000 face value of Western Energy Services bonds, with a 7.875% coupon interest rate, maturing in January 2019. I was able to buy it pretty much at par value, which is nice. 🙂 Even though the company is barely making a profit, it’s still obligated to pay me 7.875% every year. Interest is paid to bond holders before dividends are paid to shareholders. ?

15-08-western-energy-services-bond-buy

Related Post: What is a bond?

Thanks to the new bond investment my passive income is now $393.75 a year higher. Woohoo! ?  The yield to maturity for this high yield bond is about 8% a year. This rate of return is safe 🙂 as long as the company doesn’t file for bankruptcy protection before January, 2019. Here are some benefits of buying the bond of this company rather than its stock.

  • The bond pays 8% annual return. The stock only pays a 6.5% annual dividend.
  • Bonds are inherently less risky than stocks.
  • The stock dividend might get cut if the price of oil remains at these low levels. But the bond interest rate does not change.
  • If the company goes bankrupt the stock holders will lose all their money. But the bond holders can liquidate the company’s assets to recoup some of their losses.

Continue reading »