Nov. 4 (Bloomberg) -- Devon Energy Corp., the biggest U.S. independent oil and natural-gas producer, posted a smaller decline in third-quarter earnings than analysts estimated after increased output cushioned the impact of a drop in prices.

Net income fell 81 percent to $499 million, or $1.12 a share, from $2.62 billion, or $5.88, a year earlier, Oklahoma City-based Devon said today in a statement. Excluding such items as changes in the value of contracts that lock in energy prices, per-share profit dropped 64 percent to $1.10 a share, 19 cents above the average of 21 analyst estimates compiled by Bloomberg.

Production climbed 5.7 percent to the equivalent of 672,600 barrels of oil a day, driven by a 14 percent increase in oil output. Devon raised its full-year production forecast to 247 million to 249 million barrels of oil equivalent from a previous target of 243 million to 247 million.

“Revenue generation was better than expected due to the production numbers, particularly on the oily side,” said Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York. “Their costs were under control.”

Devon rose 62 cents to $67.07 in New York Stock Exchange composite trading. The stock has 13 buy ratings from analysts, 12 holds and 1 sell.

Devon’s third-quarter revenue tumbled 65 percent to $2.1 billion, led by a plunge in gas sales, as prices for the heating and power-plant fuel tumbled to a seven-year low.

Jackfish Expansion

“The challenge for Devon is what are the big catalysts for earnings going forward,” Dell said.

Devon said it intends to seek Canadian regulatory approval next year for a third phase of its Jackfish oil-sands project in Alberta. Production from the first Jackfish phase is 31,000 barrels of oil a day and will rise to 35,000 barrels by year’s end, Devon said.

Oil production rose in the quarter, led by a 37 percent increase from wells outside the U.S. and Canada, Devon said. Canadian oil output climbed 5.5 percent. U.S. gas production fell less than 1 percent.

A paper gain on the value of contracts that lock in prices added $1.2 billion to 2008 profit.

After discovery of an “encouraging oil column” at the Kaskida prospect in the Gulf of Mexico, a side-track well may be drilled, Devon said. Devon has a 30 percent stake in the project.

The company said in May that it planned to sell part of its interests in Kaskida and three other deepwater discoveries in the Gulf after appraisal of Kaskida was complete. The evaluation should be done this month, and bidding will close by the end of this year, Devon said.

Devon is the largest U.S. oil and gas producer among companies that don’t own refineries or chemicals plants.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: November 4, 2009 16:08 EST