Chevron Corp posted on Friday a 71 percent drop in profit on weaker energy prices and fuel demand due to the economic slump, but it raised estimated 2009 output and said cost cuts were on track.

The profit was short of analysts' estimates, but bad news from larger rivals a day before had prepared investors for disappointment, and shares of the second-largest U.S. oil company rose 1.6 percent to within sight of a six-week high.

Chevron made a net profit of $1.75 billion, or 87 cents per share, in the second quarter, down from $5.98 billion, or $2.90 a share, last year. Wall Street's average earnings forecast was 97 cents per share, according to Reuters Estimates.

Revenue fell 51 percent to $40 billion.

Chevron said earnings from its oil and gas production arm fell 79 percent, though production rose by 133,000 barrels to 2.67 million barrels of oil equivalent per day (boed).

George Kirkland, the executive vice president for global upstream and gas, now expects average 2009 production of 2.66 million boed, up from a previous estimate of 2.63 million.

He also said the production drop from existing fields would be about 6 percent for 2009, versus a previous estimate of 7 percent, and he indicated further improvements in the decline rate were possible as many of Chevron's big projects ramp up to capacity.

Chevron believes it is close to getting approval to develop one of those, the Gorgon liquefied natural gas project in northwest Australia.

Nothing can happen until we get the environmental permit, Kirkland told analysts on a conference call, adding that it was also waiting on final financial approval from partners Exxon Mobil Corp and Royal Dutch Shell Plc .

On Thursday, Exxon reported a steeper-than-expected drop in profit, and Shell's CEO said he saw no near-term respite from weak demand, excess capacity and high costs.

Chevron said it was ahead of pace in its efforts to cut 2009 operating expenses by 10 percent, or $2.5 billion.

Michael Cuggino, chief executive of Pacific Heights Asset Management, said it was rare for major oil companies to deliver big surprises, even if their refining margins moved up and down from quarter to quarter.

We all know what oil prices are doing, said Cuggino, whose San Francisco-based group manages about $3.6 billion in investments, including shares of Chevron. We're long-term investors, and we like the stock.

Chevron shares rose 1.6 percent to $68.77. At Thursday's close, the stock was down 8 percent this year, compared with a 2 percent rise for the Chicago Board Options Exchange index of oil stocks <.OIX>. Companies with refining arms have been hit hardest. Exxon and Shell are both down 11 percent this year.

Chevron, based in San Ramon, California, said its U.S. refining operations posted a loss of $95 million in the quarter, pulling global refining profits down to $161 million.

The price of benchmark U.S. crude averaged just short of $60 per barrel in the second quarter, up from $43 in the first quarter but less than half of year-earlier levels. U.S. natural gas prices remain near seven-year lows.

(Reporting by Matt Daily in New York and Braden Reddall in San Francisco; editing by John Wallace, Bernard Orr)