Which KrisEnergy Should I Buy?
- the KrisEnergy stock itself;
- a warrant named KrisEnergy W240131, which is convertible to the stock and will expire on 31 Jan 2024; and
- a zero-coupon bond named KrisEnergy z240131, which will also mature on 31 Jan 2024.
KrisEnergy the stock is the simplest. If oil price goes up, it will make money. Conversely, if oil price stays down, it will lose money. There is no expiry date to the stock, unless the company goes bankrupt.
KrisEnergy the warrant is also easy to understand. It can be converted into the stock at an exercise price of $0.11. Because of the exercise price, it trades at a much lower price compared to the stock. Thus, the potential for a price increase is many folds that of the stock. However, it has an expiry date of 31 Jan 2024, after which it will become worthless. Thus, for speculators who believe oil price will go up at least once in the 6.5 years before it expire can consider the warrant.
For me, there is another consideration in choosing between the stock and the warrant. I treat KrisEnergy as a minion, meaning it is a small speculative position which is mentally written off the moment it is purchased (see Meet The Minions for more info). Since the money will be written off, it does not matter whether I buy the stock or the warrant. The stock and warrant currently trade at $0.12 and $0.038 respectively. For the same amount of money, I could buy 3.16 warrants for every 1 share of the stock. Coupled with the fact that if oil price were to recover, the rise in the warrant is many folds that of the stock. Thus, between the 2, the minion strategy always prefer the warrant.
KrisEnergy the bond is an interesting one. It is a bond, which means that it will be redeemed at face value when it matures. Furthermore, in the event of bankruptcy, the bond ranks higher than the stock and warrant and might be able to recover some money back for its holders. Thus, it has less risks compared to the stock and the warrant.
Moreover, it is not a plain vanilla bond that pays regular coupons (i.e. interest) to bondholders at regular intervals and does not move much in price. It is a zero-coupon bond. Zero-coupon bonds are bonds that do not pay any coupons. Instead, zero-coupon bonds are sold at a discount but redeemed at face value when they mature. Thus, investors who buy the bonds make money by gaining capital appreciation instead of regular coupons. For KrisEnergy's zero-coupon bonds, the last traded price is $0.44. When the bond matures on 31 Jan 2024, it will be redeemed in full at $1 (assuming KrisEnergy does not default). Hence, bondholders would gain $0.56 over a period of 6.5 years. This is equivalent to a coupon rate of 13.5%. Of course, the caveat here is that KrisEnergy does not default or restructure the bonds.
Thus, to gain capital appreciation, either the stock, warrant or bond are feasible options. The best instrument to speculate in will depend on your outlook for oil price. If you are bullish about oil price in the next 6.5 years, warrant will give the best capital appreciation. If you are neutral about oil price, bond will provide the best capital gain. If you are bearish about oil price, all instruments will be bad, with bond being less worse off. An estimation of each instrument's performance under the various scenarios on oil price is as follows.
P.S. I am vested in KrisEnergy stock but planning to switch to KrisEnergy warrant.