ConocoPhillips reported a 76 percent drop in quarterly profits on Wednesday, as oil prices fell sharply from a year ago and the U.S. oil major's refining business posted a loss as heavy fuel supplies and weak demand hurt margins.

Conoco's shares fell more than 3 percent in early trade on the New York Stock Exchange.

Stockpiles of fuels like heating oil and diesel have risen to a 25-year high, according to U.S. government data, as the global recession hurt demand from industrial customers.

Conoco's profit margins were also hurt as the lower-grade, or sour, crude oil it uses in some refineries lost much of the cost advantage over higher-grade crude.

Excluding the company's 20 percent interest in Russian oil major Lukoil, The numbers on balance were disappointing, said Mark Gilman, an analyst at Benchmark Co. The upstream (oil and gas) earnings were modestly disappointing, especially outside the United States.

Net profit in the second quarter was $1.3 billion, or 87 cents per share, compared with $5.44 billion, or $3.50 per share a year earlier.

Analysts on average had expected a profit of 86 cents per share, according to Reuters Estimates.

Revenue was $35.4 billion in the quarter, down from $71.4 billion a year ago.

BE PATIENT

Peter Anderson, portfolio manager at Congress Asset Management in Boston, said he believed that some investors were focusing too intently on short-term swings in energy prices.

I think as long as Conoco can sustain a dividend and you are patient as an investor, the company has very good recovery potential, he said.

Conoco's refining and marketing business had a second-quarter loss of $52 million, compared with a profit of $664 million in the second quarter of 2008.

The company's exploration and production business had earnings of $725 million in the quarter, well below the $4 billion earned a year ago.

In the second quarter, the price for West Texas Intermediate crude oil averaged just under $60 per barrel, up from $43 per barrel last quarter but less than half the price during the same quarter a year before.

Conoco's daily oil and gas output, excluding their Lukoil interest, was 1.87 million barrels-of-oil equivalent per day. That figure is above the company's July 7 forecast for production of 1.86 million BOE per day, and 122,000 BOE per day higher than a year ago.

Shares of Conoco were down $1.63 at $42.80 on the NYSE.

(Reporting by Anna Driver in Houston; Editing by Maureen Bavdek, Phil Berlowitz)