HOUSTON Oil producer ConocoPhillips (COP.N) outshone larger competitors on Thursday with a quarterly profit that beat expectations as it moved to overcome the problems of high costs and lack of fresh reserves that have nagged at Exxon Mobil Corp (XOM.N) and Royal Dutch Shell (RDSa.L).
ConocoPhillips, the largest U.S. oil company without refining operations, said its profits were helped by the sale of its Algerian business and by higher crude oil production in North America.
The company shed its refining business in 2012 and has sold billions of dollars of lower-yielding assets to focus on more profitable oil production from North American shale basins such as the Eagle Ford in south Texas.
Analysts said Conoco's plan is beginning to pay off at a time when the industry faces pressure from shareholders to lift returns despite flat oil prices and rising costs for risky exploration work designed to replace reserves.
Conoco's profit in the fourth quarter was $2.5 billion, or $2.00 a share, compared with $1.4 billion, or $1.16 a share, a year earlier.
Excluding special items, profits inched down, though analysts characterized Conoco's reserve replacement ratio, a measure of a company's ability to find new oil and gas reserves to replace what is produced, as strong.
On a preliminary basis, Conoco's proved reserves rose 3 percent from a year earlier to 8.9 billion barrels of oil equivalent (BOE). Proved organic reserve additions are expected to be about 1.1 billion BOE for a replacement ratio of 179 percent of 2013 production.
In a note to clients, Ed Westlake of Credit Suisse dubbed Conoco the best performing large oil company, citing 7 percent growth in cash flow despite asset sales, a reduced share count and more cash on the balance sheet.
"I think we're seeing pretty good evidence that the strategy is working," Jeff Sheets, Conoco's chief financial officer, said, citing cash margin growth and expected gains in production.
Conoco's shares rose slightly, while those of Occidental Petroleum Corp (OXY.N), the fourth-largest U.S. oil and gas company, edged lower even though it reported a quarterly profit that beat expectations.
At $2.04 per share, Occidental's earnings were significantly higher than the 42 cents per share earned a year earlier, when the company wrote down the value of gas properties in the U.S. midcontinent by $1.1 billion.
At Shell, Chief Executive Ben van Beurden, just a month on the job, set out plans to make the world's No. 3 investor-owned oil company leaner, putting a new focus on increasing cash, while scrapping an Arctic drilling program.
"Our overall strategy remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance," van Beurden said. "Our returns are at this point in time too low to be considered competitive."
This year, Shell plans to slash spending to $37 billion from $46 billion and to increase asset dispositions to $15 billion - about 6.5 percent of its $228 billion market capitalization - from $1.7 billion in 2013.
The promises, along with a higher dividend, helped lift Shell's shares 1 percent to 2,147 pence.
Shell's fourth-quarter earnings, excluding identified items and on a current cost of supply basis, came in at $2.9 billion, 48 percent lower than in the year-before quarter but in line with the downgraded forecast Shell gave on January 17, making the quarter its least profitable for five years.
Shares of Exxon, the world's largest publicly traded oil company by market value, were down 0.5 percent at $94.60 after the company posted a lower-than-expected quarterly profit and failed to offset declining production with fresh reserves.
The results reflected a "mediocre quarter" for Exxon, especially in international production, Edward Jones analyst Brian Youngberg said. "They've lost momentum already, reverting back to declining production and stagnant earnings."
Exxon's oil and natural gas production fell 1.8 percent from year-before levels, with natural gas production falling around the world and oil output slipping in half the regions in which the company operates.
Still, Exxon executives said they were confident new projects in the Middle East, Asia and the United States would help boost production.
The blip in fourth-quarter results doesn't change Exxon's investment appeal, or for that matter the sector's, said Oliver Pursche of Gary Goldberg Financial Services, who manages Exxon shares for clients.
"There's nothing in this report that's overly alarming," he said. "Exxon to us is a core, long-term holding."
(Reporting By Anna Driver in Houston, Ernest Scheyder in New York and Sarah Young in London; editing by Terry Wade and Peter Galloway)