updated 7/29/2005 2:06:08 PM ET 2005-07-29T18:06:08

Chevron Corp.'s second-quarter profit topped analyst expectations, but it wasn't enough to impress investors as the second largest U.S. oil company jousts with a Chinese rival in a battle to buy Unocal Corp.

Unocal didn't lessen its takeover appeal with its second-quarter results, which were released Friday shortly after Chevron's.

San Ramon-based Chevron said it earned $3.68 billion, or $1.76 per share, for the three months ended June 30. That represented an 11 percent decline from net income of $4.13 billion, or $1.94 per share, at the same time last year.

It wasn't an apples-to-apples comparison because last year's quarter included an $800 million lift from asset sales and a tax benefit.

Revenue for this year's quarter totaled $48.3 billion, a 26 percent increase from $38.2 billion last year.

Chevron's earnings topped the mean estimate of $1.69 per share among analysts surveyed by Thomson Financial.

Exceeding those expectations was especially important for Chevron as the company girds for a pivotal round in its duel with China's government-owned CNOOC Ltd. for ownership of Unocal.

El Segundo-based Unocal's board is recommending that its shareholders accept Chevron's bid even as CNOOC fights to overcome U.S. political opposition to win with a higher all-cash bid of $18.1 billion, or $67 per share.

Chevron's cash-and-stock bid is valued at $17.2 billion, or $63.79 per share, based on Friday afternoon trading on the New York Stock Exchange, where Chevron's shares fell 38 cents to $58.56.

A vote of Unocal shareholders is scheduled Aug. 10.

Anything that causes Chevron's stock to rise would help narrow the gap between the two offers because 60 percent of the Chevron bid consists of the company's stock. Had Chevron's earnings missed analyst expectations, the company's stock — and the value of its Unocal bid — probably would have plunged even further.

The stellar second-quarter results previously released by other major oil companies had raised hopes that Chevron would surpass analyst expectations by a much wider margin than it did, said Fadel Gheit of Oppenheimer & Co. "Beating the consensus wasn't much of an accomplishment," he said.

Wall Street's tepid response to Chevron's quarter may embolden CNOOC as it tries to persuade Unocal to side with its offer despite a political backlash that threatens to delay the deal for months, if not derail it completely.

CNOOC, part of the China National Offshore Oil Corp., already has been authorized to raise its bid to $69 per share, according to documents filed with the Securities and Exchange Commission earlier this week.

But CNOOC has to balance its ability to raise its bid against its desire to avoid providing more political ammunition to its critics in Washington. Already, several lawmakers have asserted that CNOOC has an unfair advantage over Chevron because its bid depends on financing from the Chinese government. Throwing more money at Unocal's shareholders might amplify that criticism.

CNOOC has "to walk a tight rope," Gheit said. "They desperately want Unocal, but they don't want to do anything to scare the people in Congress."

Many analysts believe CNOOC will raise its bid next week just as Congress is preparing for summer recess. But a Hong Kong newspaper, quoting an unnamed source involved in the negotiations, has reported CNOOC is leaning toward abandoning its bid next .

A message left for a CNOOC spokesman in New York wasn't immediately returned.

Like the rest of its industry, Unocal also thrived in the second quarter. The company said it earned $475 million, or $1.73 per share, a 39 percent increase from net income of $341 million, or $1.25 per share, last year. Revenue for the quarter totaled $2.21 billion, a 19 percent increase from $1.8 billion last year.

If several extraordinary items had been factored in, Unocal said it would have earned $1.77 per share. That figure surpassed the mean analyst estimate of $1.63 per share, according to Thomson Financial.

Unocal's shares dropped 42 cents to $64.78 on the New York Stock Exchange. The decline indicates Wall Street is betting Unocal shareholders will accept Chevron's lower bid.

Rising oil prices helped Chevron lock in hefty profits. The company fetched an average of $45.19 per barrel of crude oil in the second quarter, a 34 percent increase from $33.74 per barrel a year ago.

But declining production prevented Chevron from fully capitalizing on the market conditions. Oil production domestically slipped 15 percent to 740,000 barrels per day while international oil production dipped 2 percent to 1.68 million barrels per day.

What's more, refinery outages reduced Chevron's profit by $150 million to $200 million during the quarter, Chief Financial Officer Steve Crow told analysts during a Friday conference calls.

Acquiring Unocal's oil holdings in Asia and the Gulf of Mexico would enable Chevron to ramp up its production.

Chevron and Unocal released their earnings at a pivotal juncture. Both companies have scheduled meetings with Unocal's shareholders during the next week to explain why they believe their marriage would be more profitable in the long run than if Unocal were to be sold to CNOOC at a higher price.

With those meetings still looming, Chevron management said little about the Unocal deal in Friday's conference call other than to predict a successful takeover would boost its earnings. "The deal's economics are very favorable," Crow said.

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