July 26 (Bloomberg) -- ConocoPhillips, the third-largest U.S. oil company, posted a 65 percent gain in second-quarter profit, exceeding analyst expectations, as crude and gasoline prices climbed and an acquisition lifted production.

Net income rose to a record $5.19 billion, or $3.09 a share, from $3.14 billion, or $2.21, a year earlier, the Houston-based company said today in a statement. Earnings per share were 28 cents higher than the average estimate from 22 analysts in a Thomson Financial survey.

ConocoPhillips took advantage of soaring prices with a 38 percent jump in oil and natural-gas output, largely on the company's acquisition in March of Burlington Resources Inc. The results may signal higher-than-predicted profits from Exxon Mobil Corp. and Chevron Corp., the two largest U.S. oil companies, when they release second-quarter reports tomorrow and the next day, respectively, an investor said.

``We're going to see most of these companies come in above expectations,'' said Ted Harper, who helps manage $8 billion in assets, including 362,000 shares of ConocoPhillips, at Frost National Bank in Houston. ``The high-priced environment has been very positive for them, and refining has been positive.''

U.S. refining margins, a measure of the gap between crude- oil costs and gasoline and diesel prices, widened to a record average of almost $16 a barrel in the second quarter. ConocoPhillips was paid an average of $64.34 per barrel of oil sold in the period, up 37 percent from a year earlier.

Output Jumps

The $35 billion Burlington acquisition helped lift second- quarter output to the equivalent of 2.13 million barrels of oil a day, not counting the company's stake in OAO Lukoil. Total revenue rose 13 percent to $47.1 billion.

A resumption of output in Libya after a two-decade absence also contributed to the production increase.

Shares of ConocoPhillips rose $1.15, or 1.7 percent, to $68.60 in New York Stock Exchange composite trading. Exxon Mobil shares climbed 1.2 percent and touched an all-time high. Chevron also rose to a record.

Hess Corp., the fifth-biggest U.S. oil company, today said it earned $565 million in the second quarter. The company's $1.26 billion in profit in this year's first two quarters is more than Hess netted in all of 2005.

BP Plc, Europe's biggest oil company, yesterday reported a 30 percent jump in second-quarter profit, to a record of $7.27 billion.

Expenses Rise

At ConocoPhillips, second-quarter profit from producing oil and gas rose 71 percent to $3.3 billion. The company's average gas price climbed 6 percent as gains overseas more than made up for a decline in the U.S.

Exploration costs jumped 11 percent as oilfield contractors charged more for their services and labor became increasingly scarce. Cost pressures are ``severe,'' Chief Executive Officer Jim Mulva, 60, told investors on a conference call.

``There's a lot of focus on costs within the industry,'' said Lanny Pendill, an analyst at Edward Jones & Co. in St. Louis who has a ``buy'' rating on the company's shares and doesn't own any. ``That's not just ConocoPhillips, that's industry wide, and that something management is going to have focus on and try to contain.''

To help keep output growing, Mulva is boosting ConcoPhillips's investment in Lukoil, Russia's largest oil company. The stake increased to 17.5 percent at the end of June and contributed $387 million in profit to ConocoPhillips, more than double the $148 million a year earlier.

`The Albatross'

The Burlington deal made ConocoPhillips the largest U.S. gas producer. U.S. gas futures touched a record high at $15.78 per million British thermal units on Dec. 13, the day after ConocoPhillips announced the Burlington purchase. The futures have dropped by more than half since then.

``They talked about running this at $8 gas, and gas is at $6, so that's the albatross until they either get better gas prices or tell a better story,'' said Robert Goodof, who helps manage $70 billion at Loomis Sayles & Co. in Boston. Loomis held almost 450,000 shares of ConocoPhillips as of a March filing.

ConocoPhillips paid off $2.7 billion in debt during the quarter, leaving it with a debt-to-capital ratio of 27 percent. The company plans to start offering some assets for sale this quarter under a previously announced plan.

Repaying Debt

Profit from refining crude into gasoline and other fuels was $1.71 billion, up 54 percent from a year earlier. The company's 12 U.S. refineries operated at 91 percent of capacity, hindered by maintenance at plants in Trainer, Pennsylvania, and Lake Charles, Louisiana. Worldwide utilization was 91 percent, down from 97 percent a year earlier.

The company was paid an average of $2.32 per gallon of gasoline sold on the wholesale market, up 39 percent.

``Gasoline demand in the U.S. shows no signs of slowing, despite higher prices,'' said Gene Pisasale, who helps oversee $48 billion at Mercantile Bankshares Corp. in Baltimore.

ConocoPhillips said it expects to record third-quarter costs of $400 million because of a retroactive tax increase in the U.K.

To contact the reporter on this story: Jim Kennett in Houston at jkennett@bloomberg.net.

Last Updated: July 26, 2006 16:05 EDT