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The U.S. energy sector has started off strong in 2013. In January, the sector reported a return of 8.16%. Individual returns for Exxon (XOM) and Chevron (CVX) in January were 3.95% and 6.48%, respectively.

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While both Exxon and Chevron reported strong fourth-quarter and full-year 2013 earnings on Feb. 1, Exxon continues to improve on its edge over Chevron. In Exxon's fourth-quarter earnings release, it reported net income of $10.0 billion for the final quarter of 2012 and $44.9 billion for the full year. Earnings per share of $2.20 for the quarter beat analysts' consensus estimate of $2.00 and signaled few surprises to be factored into the company's stock price, which opened on Feb. 1 at $90.44.

Downstream earnings showed the greatest year-over-year increase, improving 1.96 times 2011's numbers. Upstream earnings were down for the year, decreasing $4.5 billion. Chemical earnings were also down slightly, decreasing $0.5 billion. Overall, year-over-year earnings improved 9% from $41.06 billion in 2011.

Energy industry economists have been focusing on the growing oil production potential in the U.S., specifically noted in the International Energy Agency's 2012 World Outlook. The IEA's 2012 Outlook projects the U.S. will surpass Saudi Arabia as the world's largest global oil producer by 2020, helping North America become a net oil exporter by the 2030s. Exxon's recent acquisition of Denbury in the U.S. and progressing acquisition of Celtic in Canada will allow the company to realize a greater market share of the oil and gas resources in the U.S. and North America. The Denbury transaction, which was completed in the fourth quarter of 2012, will add over 200,000 acres of land for mining.

In the fourth-quarter earnings presentation, Investor Relations Vice President and Secretary David Rosenthal provided some specific resource details on the Denbury acquisition. The additional acreage will be in the high-performing middle Bakken and upper Three Forks area, according to Rosenthal. It is also adjacent to Exxon's existing properties, which will allow for strong synergies and leverage. While no volume projections have been reported yet on the acquisition, the company is working on a long-term forward plan to be disclosed later in the year.

The company's acquisition of Celtic Exploration Limited will close in 2013. Exxon Mobil plans to pay $2.63 billion for Celtic. Production in the region is expected to be 72 million cubic feet per day of natural gas and 4,000 barrels per day of crude, condensate and natural gas liquids, according to a Wall Street Journal report. The newly acquired resources in North America will help the company grow its production rate for crude oil and natural gas liquids, which ended 2012 averaging 418 kbd in the U.S and 252 kbd in Canada and South America, representing annual growth rates of -1.3% and 0.1%, respectively.

The newly acquired resources in North America will also help the company to improve its natural gas production rates, which ended 2012 averaging 3,822 mcfd in the U.S. and 364 mcfd in Canada and South America.

In addition to the positive production outlook discussed in Exxon's fourth-quarter earnings presentation, no new significant litigation developments were discussed or reported, which will also help to improve operating margins for the company in 2013. In comparison, Chevron reported fourth-quarter net income of $7.2 billion and full-year net income of $26.2 billion for 2012. Earnings per share of $3.70 also beat analysts' consensus estimate of $3.04. Downstream earnings were up 20% year over year at $4.3 billion in 2012, while upstream earnings fell 4% to $23.8 billion. In terms of production, Chevron provided 2013 guidance, stating a projected increase in net worldwide oil and gas production of 1.5% to 2,650 mboed. Significant projects for the company will be focused offshore with an emphasis on Gorgon and Wheatstone in Australia.

Unlike Exxon, one challenge for Chevron in 2013 will be expenses from litigation. The company is currently battling lawsuits in Ecuador, Canada, Argentina, and Brazil over various environmental issues. Additionally, new reports were recently issued on an $8 billion lawsuit against Chevron for oil spills in Nigeria. While litigations are pending, expenses from the lawsuits are likely to have a negative effect on profit margins for the company in 2013.

The companies' one-year price targets further exemplify Exxon's earnings edge over Chevron. Exxon, with a price target of $91.73 in 2013, has stronger upside potential. The price targets are derived from Bodie, Kane and Marcus' intrinsic value formula. The intrinsic value formula discounts the projected one-year future cash flow value by the risk-free rate on the one-year Treasury note, plus the stock's beta times the market's expected one-year risk premium. The market risk premium assumes stock market appreciation in 2013 to be similar to 2012 and is based on the Dow Jones Industrial Average index return.

Meanwhile, Chevron's price target of $114.68 indicates it's slightly overvalued at its market price of $115.84. Given the fourth-quarter earnings results and 2013 outlooks, Exxon stands out as the sector leader in 2013 for investors seeking single-stock investment potential in the energy industry.

Source: Exxon Mobil Improves Edge Over Chevron