July 25 (Bloomberg) -- ConocoPhillips, the third-largest U.S. oil company, posted a smaller drop in profit than analysts estimated as refining earnings damped the impact of a write-off from asset seizures in Venezuela.

Second-quarter profit slid 94 percent to $301 million, or 18 cents a share, from a record $5.19 billion, or $3.09, a year earlier, Houston-based ConocoPhillips said today in a statement. Costs for the Venezuela exit cut net income by $4.51 billion.

Venezuela took two heavy-oil ventures and another project when ConocoPhillips refused to cede ownership. A 38 percent gain in refining profit, boosted by record U.S. gasoline prices, made up for a drop in earnings from oil and natural-gas production. ConocoPhillips exceeded the average analyst earnings estimate in a Bloomberg survey by 22 cents a share.

``Refining was the savior here, no question,'' said Bernard Picchi, an analyst at Wall Street Access in New York who rates the company at ``buy'' and owns an undisclosed number of its shares. ``Having lower production earnings was not at all surprising, given that oil prices a year ago were much higher than they were in the second quarter.''

Shares of ConocoPhillips rose $1.96, or 2.4 percent, to $84.29 in New York Stock Exchange composite trading. The stock has climbed 17 percent this year.

Refining Profit Soars

Earnings from refining crude oil into fuels such as gasoline and diesel jumped to $2.36 billion, ConocoPhillips said. Refineries operated at 93 percent of capacity, and the company spent $58 million on maintenance, half of what it did in last year's second quarter.

ConocoPhillips is the second-largest U.S. refiner, behind Valero Energy Corp., and became the biggest gas producer with its acquisition last year of Burlington Resources Inc. Gas futures in New York have dropped more than 60 percent since setting a record in December 2005, the day after ConocoPhillips announced its $35 billion purchase of Burlington.

Profit from producing oil and gas tumbled 36 percent to $2.12 billion, excluding the Venezuela write-off. Oil futures in New York traded 8.1 percent lower, on average, than a year earlier. ConocoPhillips said its output dropped more than 9 percent to the equivalent of 1.9 million barrels of oil a day.

London-based BP said yesterday that its second-quarter output fell 5.3 percent from a year earlier. ConocoPhillips cut its full-year output forecast by 2.1 percent, to the equivalent of 2.33 million barrels of oil a day.

`Epidemic' Shortfall

``The problems seem to be epidemic throughout the industry, which is a macro issue for the world,'' said John Parry, an analyst at John S. Herold Inc. in Norwalk, Connecticut. ``The big majors are not cutting the mustard in terms of helping boost oil supply.''

Maintenance work in the North Sea, asset sales, and production cuts by Organization of Petroleum Exporting Countries nations where ConocoPhillips has oil fields contributed to the decline in output, the company said.

ConocoPhillips is first among the three largest U.S. oil producers to report second-quarter earnings. Irving, Texas-based Exxon Mobil Corp., the world's largest oil company, is scheduled to report its results tomorrow, and Chevron Corp. of San Ramon, California, plans to release its report the next day.

Excluding the Venezuela costs, profit was $2.90 a share, ConocoPhillips said. The company was expected to earn $2.68, the average of 14 analyst estimates compiled by Bloomberg.

Revenue rose to $47.4 billion from $47.1 billion.

Venezuelan Takeover

Venezuela accounted for about 10 percent of the company's reserves and more than 4 percent of output. The country's president, Hugo Chavez, seized control of heavy-oil joint ventures under his plan to nationalize key assets.

ConocoPhillips said the lost production in Venezuela will drag the current quarter's output lower than its second-quarter average. The company is still trying to negotiate compensation from Chavez's government for the seized assets before taking its claims to arbitration.

Getting the damage from Venezuela out of the way in one quarter may help ConocoPhillips, said Robert Goodof, who helps manage $20 billion in equities, including about 550,000 ConocoPhillips shares, at Loomis Sayles & Co. in Boston.

``The Venezuela write-off obviously has a big effect,'' Goodof said. ``It was going to happen. Now anything that happens there is probably an upside.''

Industrywide, the average profit margin on turning crude oil into fuels such as gasoline and diesel was 50 percent higher than a year earlier, based on benchmark futures prices. The so- called crack spread touched a record high at $30.48 per barrel of oil processed in May.

Refinery Repairs

Maintenance work and repairs at U.S. refineries reduced fuel supplies, contributing to a surge in prices. U.S. refineries ran at 89.1 percent of capacity during the quarter, down from 90.3 percent a year earlier, as companies scrambled to find enough skilled workers and parts.

``Everything seems to be taking longer than it used to,'' said Philip Weiss, an analyst at Argus Research Corp. in New York. ``There's less qualified people doing the work, and more stringent fuel specifications,'' which make the work more difficult.

With its higher utilization of refineries, ConocoPhillips was able to take better advantage of the price gains. The company has 12 plants scattered across the Midwest and along the East, West and Gulf coasts. It also has plants in Europe and one in Asia.

Pipelines, Chemicals

Second-quarter earnings from a pipeline and gas-processing joint venture with Spectra Energy Corp. fell 5.6 percent to $102 million, the company said.

ConocoPhillips' chemicals business, held in a 50-50 venture with Chevron, earned $68 million, down 34 percent.

The company's 20 percent stake in Russia's largest oil company, OAO Lukoil, earned ConocoPhillips $526 million, up 36 percent from a year earlier, when the ownership interest was smaller. ConocoPhillips earns a dividend from the Lukoil investment.

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

Last Updated: July 25, 2007 16:13 EDT