2nd UPDATE: Chevron 1Q Net Up 4.2% Despite Production Drop

Chevron Corp. (CVX) said first-quarter net income rose 4.2% as higher oil prices boosted profits from its exploration and production arm, and refining margins improved, outshining a drop in production.

Chevron reported a profit of $6.47 billion, or $3.27 a share, up from $6.21 billion, or $3.09 a share, a year earlier. The latest period included net charges of $504 million, compared with $388 million a year earlier. Excluding the benefit of asset sales, Chevron's earnings per share were $3.17, below expectations of $3.26 a share.

Revenue edged up 0.6% to $60.71 billion.

Chevron became the only U.S. major oil company to post higher quarterly earnings compared with a year ago after rivals Exxon Mobil Corp. (XOM) and ConocoPhillips (COP) had profits drop despite higher crude prices. Chevron's results benefited from higher exposure to climbing crude prices and less vulnerability to depressed U.S. natural-gas prices than Exxon and Conoco, said Allen Good, an analyst with Morningstar.

Chevron, however, echoed the trend of lower production reported by Exxon and Conoco, showing the sector's bigwigs continue to struggle to increase their output as their fields deplete and access to new resources remains a challenge. Chevron's output slipped 4.7% to 2.63 million barrels of oil equivalent per day as production increases from projects in Thailand and the U.S. were more than offset by normal field declines, maintenance-related downtime and dispositions, the company said.

Speaking to analysts on a conference call, Chevron Chief Financial Officer Patricia Yarrington said the company is sticking to its full-year production guidance of 2.68 million barrels of oil equivalent per day, despite the impact of the March shut-down of its Frade field offshore Brazil following an oil spill.

Chevron is conducting a study on the geology of the field and expects to resume production only when it is completely satisfied it can safely resume operations and has obtained support from regulators, the company said. The estimated impact of Frade's shut-in on Chevron's production is 33,000 barrels of oil per day, the company said.

The San Ramon, Calif., company doesn't expect to use its abundant cash--$18.9 billion at the end of the first quarter--on capital expenditure overruns but it will evaluate the possibility of spending more in share buybacks while maintaining dividends as its top priority, Yarrington said. Chevron has said it expects to spend $32.7 billion in capital projects this year.

Asked why the company needs to have so much cash on its balance sheet, Yarrington said Chevron is "keeping some caution" while the company is going through "a heavy investment period" in which it has to fund massive liquefied natural gas projects offshore Australia--Gorgon and Wheatstone. The company also needs to be prepared in case oil prices drop, she added.

The company will evaluate a possible increase of its share repurchase program once it passes the heavy investment phase, the company said. Meanwhile, Chevron expects to spend $1.25 billion on share buybacks in the second quarter, unchanged from the first quarter.

Raymond James analyst Pavel Molchanov said in a research note that while Chevron missed analyst expectations and its current production growth is "minimal", the start-up of Gorgon and Wheatstone by the mid of the decade make the stock attractive. "With a $19 billion cash-war chest, there is room to speed up buyback, something we hope management will consider later in the year," Molchanov said. "We reiterate our Strong Buy rating."

Separately, although the company's operations in Argentina are unaffected by the recent nationalization of YPF SA (YPF, YPFD.BA), the country's largest oil company, Chevron is concerned about developments in the South American nation, Yarrington said.

In Nigeria, a blown-out offshore natural gas well is expected to be permanently abandoned by the end of May after ongoing work to plug the well concludes, the company said.

Chevron also reported a dry exploratory well in China, the third in the region.

In the U.S., Chevron said it continues to increase drilling in Pennsylvania's natural-gas rich Marcellus Shale despite low prices because it is taking advantage of an agreement with India's Reliance Industries Ltd. (500325.BY) that lets Reliance carry a significant amount of the drilling costs.

Chevron's exploration-and-production earnings rose 3.2% to $6.17 billion, helped by higher crude-oil realizations. The average price at which Chevron sold its international oil production was $110 per barrel, up from $95 a year earlier. The average international price of natural gas was $5.88 per thousand cubic feet, compared with $5.03 in last year's first quarter.

In the U.S., Chevron's average sales price for oil was $102 per barrel, up from $89 a year ago and $2.48 per thousand cubic feet for natural gas, compared with $4.04 in last year's first quarter.

Chevron's refining, marketing and chemical operations, or downstream operations, saw earnings jump 29% to $804 million as the segment benefited from gains on asset sales. The company said lower refined product margins were offset by favorable derivative effects.

Shares were recently trading up three cents at $106.25.

-By Isabel Ordonez, Dow Jones Newswires; 713-547-9207; isabel.ordonez@dowjones.com

--Nathalie Tadena in New York contributed to this article.