Jan 31 (Reuters) - Chevron Corp, the second-largest U.S. oil company, said its quarterly profit dropped 32 percent and posted a modest production outlook for this year despite surging capital spending, sending shares down sharply on Friday. The stock recorded its biggest daily percent decline since October 2012, losing 3.2 percent to $112.70 in afternoon trading. Like Exxon Mobil, Royal Dutch Shell and other international energy giants, Chevron has tried to offset declining production at its oil and natural gas wells by spending massively on new exploration projects. Chevron spent $41.9 billion last year on new oil and natural gas projects, a 23 percent increase from 2012. Chief Executive John Watson said he expects capital spending to be in the "$40 billion range" for the next few years. Despite the higher spending, oil and natural gas production fell 3.4 percent to 2.6 million barrels of oil equivalent per day (boe/d) in the fourth quarter. Chevron said rising production in the United States and Nigeria wasn't enough to offset declining production at legacy fields around the world, which typically lose about 4 percent of their reserves annually. For 2014, Chevron expects total production of 2.6 million boe/d, 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 those growth projects, including two massive liquefied natural gas projects in Australia and deepwater wells in the U.S. Gulf of Mexico. "We are in a depleting resource business, and you do need to add to the portfolio," Watson said on a conference call with investors. 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.