Exxon Mobil reported quarterly earnings that narrowly beat expectations, on higher oil prices and asset sales of about $1 billion, but the company's shares dropped nearly 2% as its oil and gas production fell short of estimates.

Exxon, the world's largest publicly traded oil company, said fourth-quarter production dropped 9%, which Barclays Capital analyst Paul Cheng found "disappointing" even after accounting for reduced European natural gas sales due to warm weather.

"There's no strong evidence that the portfolio is delivering the capability to grow and frankly, based on our preliminary take, it looks like costs are going the wrong way," said Mark Gilman, analyst at The Benchmark Company. "There's not a lot to smile about."

While 2011 output rose 1%, this was all natural gas as the production of more lucrative liquids declined. Plus, Exxon's capital expenditures rose to a record $36.8 billion, the top of the range of its multi-year forecast, and oilfield spending generally is expected to increase further this year.

"We are in a capex mode now and have been for the last year or two, and will for the next couple years be investing in large legacy projects," Exxon spokesman David Rosenthal told analysts on a conference call.

Spending billions just to maintain steady output has become the norm for the world's top oil companies. Chevron increased its 2012 capital spending plans to $32.7 billion after its 2011 budget came in $3 billion higher than originally expected.

Yet in spite of weak U.S. natural gas prices, Irving, Texas-based Exxon has not curtailed domestic gas production, even if it is shifting rigs to basins with more liquids.

Exxon posted fourth-quarter net income of $9.4 billion, or $1.97 per share, compared with $9.25 billion, or $1.85 per share, in the year-ago period. Analysts, on average, had expected $1.96 per share, according to Thomson Reuters I/B/E/S. Analysts lowered their expectations by a few cents in the past week.

The quarterly profit was Exxon's lowest for 2011.

Exxon's revenue rose 16% to $121.61 billion, exceeding the $119.7 billion expected, on average, by analysts.

The company's Canadian subsidiary, Imperial Oil, on Tuesday reported a 26% increase in profit, on higher crude prices and an improved refining performance.

Rising oil prices also helped lift Exxon Mobil's profits at its upstream unit, which produces oil and natural gas, by 18%. Land sales contributed to earnings, it said.

Still, weak economic conditions hurt Exxon's margins. Profit at its downstream unit, which makes engine lubricant and fuel, fell 13%. Profit at its chemical unit, which makes plastics and related products, declined 49%.

Exxon spent $10 billion during the quarter on capital projects and exploration, in line with the same period in 2010.