Oct. 24 (Bloomberg) -- ConocoPhillips, the third-largest U.S. oil producer, said net income fell 5.2 percent as refined fuel prices failed to keep pace with gains by crude, narrowing profit margins on gasoline and diesel.

Third-quarter profit fell to $3.67 billion, or $2.23 a share, from $3.88 billion, or $2.31, a year earlier, Houston- based ConocoPhillips said today in a statement. Revenue fell 4.2 percent to $46.1 billion.

``It comes down to one thing, which is refining margins,'' said Bernard Picchi, an analyst at Wall Street Access in New York who rates ConocoPhillips shares at ``buy'' and owns a small number of them. ``Margins are lower this year because of higher crude oil-prices and the inability of the marketers, for whatever reason, to be able to capture in their prices the cost of the raw material.''

Gasoline futures in New York traded 2.7 percent higher, on average, than a year earlier, compared with a 6.4 percent gain by oil futures. ConocoPhillips also saw oil and natural-gas output fall on downtime at fields from Alaska to the North Sea and a decision in June to exit Venezuela.

ConocoPhillips shares fell $1.57, or 1.9 percent, to $81.65 in New York Stock Exchange composite trading. Before today, the stock had climbed 16 percent this year.

Divestiture, Tax Gains

Net income included gains from asset sales and tax benefits. Excluding such items, profit was $1.94 a share, analyst Michael LaMotte of JPMorgan Chase & Co. said in a note to clients. The company was expected to earn $2.18 a share, the average of 15 analyst estimates compiled by Bloomberg.

ConocoPhillips is first among the three largest U.S. oil producers to report third-quarter earnings. Exxon Mobil Corp. of Irving, Texas, plans to report on Nov. 1, and San Ramon, California-based Chevron Corp. is scheduled for Nov. 2.

U.S. refiners wrestled to maintain profitability as oil prices jumped to a record in the latest quarter, a trend that has persisted. The average gap between prices for crude and refined fuels narrowed to $6.65 per barrel at the end of the third quarter from $20.71 at the start, based on futures.

That decline has continued, with the average margin standing at $4.75 a barrel at the end of last week after oil futures climbed above $90 a barrel for the first time. ConocoPhillips has the second-largest U.S. refining capacity, behind only San Antonio-based Valero Energy Corp.

Refining Profit Falls

Refining and marketing profit fell 11 percent from a year earlier to $1.31 billion, ConocoPhillips said. Beyond the impact of narrowing margins, the company gave up some refining capacity when it contributed to U.S. plants to a joint venture with EnCana Corp. The 2006 results included an insurance gain.

ConocoPhillips' U.S. refineries ran at 97 percent of capacity during the quarter, up from a year earlier and exceeding the industry average of 91 percent.

A typically weak period for refiners, between the end of the summer driving season and the start of heating demand, is being exacerbated by a slowing economy, said Robert Goodof, who helps manage $22 billion at Loomis Sayles & Co. in Boston. Gasoline demand for the four weeks ended Oct. 12 was down 0.5 percent from a year earlier, on average, while jet-fuel demand was down 3.9 percent, the U.S. Energy Department said.

``The refining issues are real,'' said Goodof, whose holdings include about 550,000 ConocoPhillips shares. ``The economy is slowing.''

Production Declines

Oil and gas production fell to the equivalent of 1.76 million barrels of crude a day from 2.04 million a year earlier, not including the company's stake in Russian oil producer OAO Lukoil, ConocoPhillips said.

Exiting Venezuela accounted for about half of the drop, Chief Executive Officer Jim Mulva has said. ConocoPhillips refused to sign contracts under pressure from President Hugo Chavez's government that would have given it a lower share of production.

Major oil producers are ``all trying to figure out how they can get growth going again,'' said Brian Youngberg, an analyst at Edward Jones in Des Peres, Missouri, who has a ``buy'' rating on ConocoPhillips shares and doesn't own any. ``It is a challenge, and I think the market is trying to fish out which one starts to do better than the others.''

ConocoPhillips said its fourth-quarter output will rise by as much as 60,000 barrels a day as maintenance projects end. The company said third-quarter profit from producing oil and natural gas rose 9.3 percent to $2.08 billion. Youngberg credited gains in crude prices for the increase.

Gas-Weighted

The company's purchase last year of Burlington Resources Inc. weighted output toward natural gas, futures prices for which averaged 0.9 percent higher than a year earlier. Oil futures rose 6.4 percent, averaging $75.15 a barrel.

As state oil companies reduce access to reserve in oil-rich nations, ConocoPhillips CEO Mulva has sought out new partnerships to gain access to Canadian and Russian resources.

The company completed purchasing a 20 percent stake in Lukoil last year and announced in October 2006 the venture with Calgary-based EnCana to tap Canada's oil sands.

ConocoPhillips said it earned $387 million from its Lukoil stake, down 21 percent from a year earlier. Profit from DCP Midstream, a pipeline and gas-processing venture with Spectra Energy Corp., fell 38 percent to $104 million. ConocoPhillips' chemicals business, held in a 50-50 joint venture with Chevron, had earnings of $110 million, down 23 percent.

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

Last Updated: October 24, 2007 16:08 EDT