Chevron Corp posted a 51 percent drop in quarterly profit on Friday, becoming the latest oil major to be hit by the steep decline in oil and natural gas prices and anemic margins at refineries.

Although the profit was better than expected, shares of the second-largest U.S. oil company behind Exxon Mobil Corp slid 2.4 percent, in line with a sharp drop in U.S. crude prices and the broader stock market.

Chevron offset part of the sharp drop in energy prices in the past year by increasing its oil output and cutting costs during the quarter.

Chief Financial Officer Pat Yarrington said two-thirds of the cost-cuts were permanent and unrelated to fluctuating prices and also said Chevron expects to exceed its recently raised 2009 production target of 2.66 million barrels per day.

Credit Suisse analysts said in a note to investors it was the best set of results from Chevron for a long time, particularly after Exxon's disappointing results on Thursday.

Exxon and Royal Dutch Shell Plc dashed hopes for a near-term industry turnaround, saying a limp economic recovery was weighing on energy demand and prices.

Chevron's third-quarter net profit fell to $3.83 billion, or $1.92 per share, from $7.89 billion, or $3.85 per share, a year before. Excluding $400 million in gains from asset sales and other items, it earned $1.72 per share, topping the $1.47 analysts had forecast, according to Thomson Reuters I/B/E/S.

However, revenues fell 41 percent to $46.6 billion, slightly below the $47 billion analysts had forecast.

Chevron's earnings from oil production fell 41 percent as an increase in output helped reduce the impact from the drop in oil prices, which reached a record in the year-earlier period.

Oil and gas output rose 11 percent from a year before to 2.70 million oil-equivalent barrels per day, boosted by the start-up of the Blind Faith and Tahiti fields in the Gulf of Mexico and the Agbami field in Nigeria and an expansion at Tengiz in Kazakhstan.

Earnings from refineries fell 90 percent to $194 million, and were particularly hard-hit in the United States, where the company pulled in a modest $34 million in quarterly profit.

Chief Executive David O'Reilly said he expects refining to remain pretty sloppy for the next two years as smaller players shut down capacity and demand recovers, though he is encouraged by how much stronger Asian demand now looks.

O'Reilly also said Chevron is looking at getting involved in the quickly growing U.S. shale gas drilling business, but only under the right circumstances.

We have to be able to do it at scale to move the needle, he said in what was his last quarterly conference call with analysts and investors before handing the reins to incoming CEO John Watson at the start of 2010.

Chevron shares fell 2.4 percent to $76.08. The stock had been up 5 percent in 2009, versus a 16 percent gain for the Chicago Board Options Exchange <.OIX> index of oil companies, as those without refinery exposure have fared much better.

U.S. oil prices averaged $68 per barrel in the third quarter, up from nearly $60 per barrel in the second quarter but down from $118 in the same quarter a year ago.

(Reporting by Matt Daily in New York and Braden Reddall in San Francisco, editing by Dave Zimmerman and Gerald E. McCormick)