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If you want to succeed in the volatile, capital intensive business of oil and gas drilling, production and refining, you need capital, cash reserves, efficient management and sometimes a little luck. Size doesn't hurt either.

Exxon Mobil (NYSE:XOM) has the advantage of being the biggest fish in the pond of oil and gas. In fact, it has been locked in a back-and-forth battle with Apple (NASDAQ:AAPL) for the title of world's largest company based on market capitalization.

And what does the company do with its capital? Quite a bit, based on the fact it boasts the highest return on its capital of anybody in the industry at 24.2%. This means it is the most efficient company among its peers at allocating capital toward profitable endeavors.

Vs The Competitors

Exxon Mobil shines in many other areas compared with its industry peers. First, its debt-to equity ratio, which indicates what proportion of equity and debt the company is using to finance its assets, stands at a microscopic 0.07, or about one-fourth the industry average of 0.29. Second, its return on investment is 25%, compared with the industry average of 16%.

While its five-year sales growth rate is half the industry average (5.89% to 11.88%), its earnings per share growth rate over the same period has exceeded the industry (3% to 0.85%). Exxon Mobil's five-year average gross margin is better than the industry average (34.7% to 26.7%) as its five-year dividend growth rate (7.7% to 2.15%).

Recent Performance

Exxon Mobil's stock has been relatively quiet over the past year, trading between $77 and $93 a share, currently settled in at $88. Its price-to-earnings ratio is just over 9.

Exxon Mobil recently reported a strong 2012 and fourth quarter. Earnings grew 6% for the fourth quarter from the previous year to $9.95 billion, and increased 9% for the full year from 2011 to $44.88 million. Its quarterly earnings per share was $2.20, up 12% from the same quarter the year prior. Its annual EPS was $9.70, up 15% from 2011.

Analysts point to the continued integration of Exxon Mobil's upstream and downstream operations as a catalyst for its strong earnings. Exxon Mobil generates most of its revenues and profits from upstream operations, but this business was less profitable than the previous year because of lower prices and production. Upstream earnings totaled $7.76 billion in the quarter, a decline of $1.06 billion from the same quarter of 2011. However, downstream earnings from refining and chemical distribution tripled year-over-year to $1.76 billion for the quarter.

Exxon typically distributes a larger portion of its earnings back to shareholders, which a company of its size has the capacity to do. The corporation distributed over $30 billion to shareholders in 2012 through dividends and share purchases to reduce shares outstanding.

Yet despite this generosity, Exxon Mobil still has $13 billion in cash in the bank. Its payout ratio, which is the percentage of earnings paid out as dividends, is 22%. A low payout ratio such as this indicates that its current dividend rate is safe and the company has plenty of room to raise it and still maintain a healthy cash position.

Exxon Mobil has shown the ability to generate large amounts of cash from its operations, from $28 billion in 2009 to more than $55 billion in 2011. This is important, as it means the company doesn't depend as heavily on debt financing, which comes with interest expenses later, or through the sale of assets, which potentially limits revenue later.

Capital and exploration costs increased 24% over the previous fourth quarter while overall oil production declined 5%. For the year, exploration costs jumped to a record $40 billion while production declined 6%.

Advantages

Some analysts believe Exxon is also in the best position to take advantage of the hydrofracking revolution underway in the U.S., with new drilling techniques opening large domestic reserves.

First, the company has built its brand and reputation on being an environmentally friendly company following the 1989 Valdez oil spill. Convincing governments, communities and environmentalists that shale gas can be extracted with minimal harm to surroundings is key to making this a long-term venture; negative impacts to the environment will likely shut down production. Because this technique requires abundant water, it worries communities about the potential depletion of their supplies. Exxon has answered these concerns by using large amounts of recycled water. In addition, it is building pipelines to reduce the need to store fresh water and to minimize truck traffic.

Exxon's other major advantage in this new area is its capital reserves: Any new technology requires abundant capital investment. Exxon is large enough to squeeze out smaller competitors from this opportunity and essentially grab the dominant market share in domestic energy production.

Exxon Mobil's future also looks bright to some because of its current holdings and diversification.

At the end of 2011, Exxon had proven oil reserves of almost 25 billion barrels. This means that if the company failed to discover any more black gold in the ground, it would have enough to last 15 years.

Exxon Mobil generates about 68% of its revenue in international markets. Yet the company has also discovered new fuel sources domestically and is poised to benefit if the U.S. indeed becomes one of the world's leading energy producers.

Exxon Mobil commenced start-up operations at one of the world's largest ethylene steam crackers, the centerpiece of the company's multi-billion dollar expansion at its Singapore petrochemical complex. Powered by a new 220-megawatt cogeneration plant, the expansion adds 2.6 million tons per year of new finished product capacity.

Exxon Mobil commenced start-up operations at one of the world's largest ethylene steam crackers, the centerpiece of the company's multi-billion dollar expansion at its Singapore petrochemical complex. Powered by a new 220-megawatt cogeneration plant, the expansion adds 2.6 million tons per year of new finished product capacity.

The Biggest Fish In The Sea

So the biggest fish in oil and gas appears to be getting bigger, ready to swallow up anything - competitors and untapped fuel supplies - to maintain its industry dominance.

Source: Exxon Mobil: Can Its Dominance Continue?