By Ernest Scheyder Jan 31 (Reuters) - Chevron Corp plans to keep spending roughly $40 billion per year for the next several years on new oil and natural gas projects in a bid to lift production that is on track to be flat for the third straight year. That stay-the-course approach, announced on Friday after the second-largest U.S. oil company said its quarterly profit dropped 32 percent, spooked investors and prompted the stock to fall 3.5 percent, the most of any large energy producer this quarter. Like Exxon Mobil Corp, Royal Dutch Shell and other international energy companies, Chevron has tried to offset declining production at its existing oil and natural gas wells by spending massively on new exploration projects. But Shell announced earlier this week that it would focus more on energy projects that have the best chance of success, cutting spending and also selling underperforming assets. The news boosted Shell's stock. Chevron has taken the opposite approach and plans to keep the cash flowing. It spent $41.9 billion last year on energy projects, a 23 percent increase from 2012. Chevron Chief Executive John Watson said he expects capital spending to be in the $40 billion range for the next few years. Chevron is betting that its relatively high dividend yield for the energy industry and its large stock buyback program will appease investors until five of its major projects, including two massive liquefied natural gas projects in Australia and deepwater wells in the U.S. Gulf of Mexico, are online. "Basically it's a treadmill," said Oppenheimer & Co analyst Fadel Gheit. "Yes, all these new projects will add oil. But guess what, until they hit that goal, their base line production is declining." Chevron's oil and natural gas production fell 3.4 percent in the fourth quarter to 2.6 million barrels of oil equivalent per day (boed). Rising production in the United States and Nigeria wasn't enough to offset declining production at legacy fields around the world, which typically see production slip 4 percent annually, Chevron said. For 2014, Chevron expects total production of 2.6 million boed, up only 0.5 percent from 2013 levels. The estimate missed Wall Street's expectations and disappointed investors, who had hoped 2014 would be a "positive transition year" toward 2017 when new projects come online, Credit Suisse analyst Edward Westlake said in a note. Even if Chevron hits its 2014 production goal, it would only be on par with 2012 levels. Looking forward, Chevron said it has made significant progress on its five main growth projects. In total, the five new protects will add 500,000 boed in production, the company estimates, once fully online. "We are in a depleting resource business, and you do need to add to the portfolio," Watson said on a conference call with investors. Last year the company said by 2017 it expects daily production to be 3.3 million boed. The company reported net income of $4.93 billion, or $2.57 per share, compared with $7.25 billion, or $3.70 per share, in the year-ago period. The quarterly profit met expectations of Wall Street analysts, according to Thomson Reuters I/B/E/S. The results were not a total surprise to Wall Street, as Chevron hinted earlier this month that its fourth-quarter profit would be "comparable" with third-quarter results, when it posted net income of $4.95 billion. In refining, profit plunged 58 percent due to shrinking margins, largely due to price differentials between different types of crude oil. Refiners make more money when the price difference between various types of crude oil is wide. When the gap narrows in the price differences, costs tend to rise. Exxon on Thursday posted weakness in its own refining unit. Profit also fell in Chevron's smallest unit, the power generation and mining unit. Chevron shares fell $4.02, or 3.5 percent, to $112.40 in afternoon trading. The stock is down about 2.4 percent over the past 52 weeks.