The Share That Made Fools Millions

Published in Company Comment on 12 July 2012

This oil company has made millions for Fool readers.

SOCO International (LSE: SIA) is an oil exploration and production company with a market capitalisation of £1.1bn. For around 10 years, SOCO has been one of the most popular companies among our readers. Many Fools have made significant profits from owning shares in SOCO, with aggregate profits totalling millions of pounds.

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I met recently with SOCO's deputy chief executive and chief financial officer, Roger Cagle. Raised near the oil fields of south-east Oklahoma, Mr Cagle is one half of the key duo behind SOCO's success. His working relationship with SOCO chief executive Ed Story began over 35 years ago. I spoke to Mr Cagle to learn how SOCO has been so successful and what their example teaches Fools about investing in the sector.

1) Management with 'skin in the game'

Super-investor Warren Buffett likes to back companies where management owns a substantial amount of stock themselves. Buffett calls this having 'skin in the game'. There is hardly a listed oil explorer of similar size where management has greater exposure to the company's success than at SOCO. Between them, Roger Cagle and Ed Story own 5.4% of the company they started. When management owns a significant stake, their financial interests are aligned with shareholders'. The investment logic is that such managers will make better decisions.

Mr Cagle explains the SOCO approach thus:

"We are not driven by our share price, we are driven by creating value. In this industry those two things are very different. We treat this business like it is our own money because a lot of it is. We have never taken a penny off the table. None of the management have taken any money off the table for personal profit. We have a business model that has worked several times before. If you are successful in implementing an E&P model, you will eventually become a producer, generating cashflow."

SOCO's model of 'Recognising opportunity. Capturing potential. Realising value' has been demonstrated by their actions of recent years through asset transactions and production increases.

2) Drill where there is already oil

The exploration and production (E&P) sector can be divided in two. There are the companies that are engaged in frontier exploration and companies sticking to safer plays. Investors (particularly private investors) are often drawn to junior oil companies offering the prospect of massive gains. These firms are frequently exploring in areas where oil has not previously been discovered in commercial quantities. Though payoffs can be spectacular if such exploration is successful, often it ends in disappointment. Many investors make the first mistakes in their investing career buying shares in speculative oil explorers.

SOCO is an entirely different proposition. The company does not get involved in such 'Monte Carlo or bust' exploration. SOCO's portfolio combines both exploration assets in the Democratic Republic of Congo and producing assets in Vietnam. Mr Cagle explains how SOCO's approach is distinct:

"We are not going to drill anywhere there is not a known oil basin. Exploratory wells are vastly expensive. SOCO seeks to reduce its investment cost. Part of this is done by going to the expense of generating our own seismic analysis of exploration prospects. We can then use this to attract other industry partners. This reduces risk."

3) Attitude to risk

You don't need to be investing long to have seen an oil explorer disappoint its investors. Oil exploration involves the management of a number of risks. Some firms structure their business such that their survival may depend on their next well hitting paydirt. Others have been caught off-guard by political developments, resulting in huge costs to shareholders. During our meeting, Roger Cagle spoke extensively about SOCO's attitude to risk and how this affects the company's management of its portfolio. He explained SOCO's philosophy like this:

"Oil exploration is a risky business. Not even the largest companies take 100% of the risk on a well. In my experience the chance of success from a given exploration well is 10%. Our capital requirements are based on every well we drill being a dry hole. We don't go to a geography to drill just one well. We want several different chances of something working."

These "different chances" mean drilling different geological features in the same area.

4) Do your own research

If you are serious about investing in the E&P sector you want access to the best research available. Fortunately, we have some of the top analytical brains right here on The Motley Fool's discussion boards. There is a general sector investment discussion board here and the SOCO board is here. Don't just take my word for it, the reputation of the Fool user community is well known. Roger Cagle knows all about some of the excellent analysis posted on our boards and has his own theory on why it is so good. He says: "Many of the guys on the Fool's boards are producing top quality analysis. Why? Primarily because it is their own money at stake."

If you are feeling inspired by the success Fools have enjoyed with SOCO International then download our report "10 Steps To Making A Million In The Market" It's 100% free!

Further investment opportunities:

> David owns shares in SOCO International.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

ProfessorMarcus 12 Jul 2012 , 1:26pm

XEL - the share that made Fools into paupers....

Dozey1 12 Jul 2012 , 5:56pm

"Many Fools have made significant profits from owning shares in SOCO, with aggregate profits totalling millions of pounds."

True, I've made a few bob myself, but it might have been worth mentioning that the price now is near the bottom of a range started in 2006. The price reached £6 in 2007, so there may be other Fools who have lost millions.

NotherHubbard 12 Jul 2012 , 6:50pm

A great shame that the Fool does not acknowledge the huge influence of EmptyEnd in researching and bringing SOCO to the attention of the masses. Just because he no longer posts here is no reason not to give credit where it is due.

patterbu 13 Jul 2012 , 10:32am

I could not agree with Notherhubbard more. I have met ee , once in london at an Soco AGM and once in malaysia. His contributions on this board and where he now posts, are 1005 GENUINE, he may be and can be a bit blunt , but what he writes is what he believes, nothing more nothing less.
He is not a bad golfer either!!

patterbu 13 Jul 2012 , 10:32am

sorry make that 100% not 1005( sticky shift key)

TomKe 13 Jul 2012 , 12:39pm

If you are interested in this article then I suggest that you read the comments on the Soco board. I whole heartedly agree with the comment made by Kenobi that " the admission that pyad and others, considered soco tinpot, and vietnam risky, would have added value to the article. Reading it as it is, makes it sound like everyone agreed it was a winner from day one. Not how I remember it at all, ".

The article is too simplistic and would be better if made clear that there have been always strongly conflicting views as to the quality of the investment and sometimes even the authors at The Fool get it wrong.


kuronagi 13 Jul 2012 , 10:23pm

I bought my first shares in SIA in April 2008 at around £18 (old money) equivalent to £4.50 (current). I have added (some at even higher prices) and added and now have a substantial holding at an average price of 398p which is still significantly "under water". Therefore the headline of this article " This oil company has made millions for Fool readers" is a tad misleading. How does the author know?

Like most matters pertaining to investment, the rub is in the timing. I arrived shortly before the party peaked and before experienced party animals (including KingMcK) retired home for an early night (and suffered less of a hangover).

Perhaps the author would like to pour salt on the wounds by penning a similar article about Aminex with the same title "This oil company has made millions for Fool readers".

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