By and large, if you're in the business of pumping, refining, and selling oil, it's generally not going to be a good thing when your production levels and refining margins slip. That's what happened at ChevronTexaco (NYSE:CVX) in the first quarter, though, and earnings were disappointing relative to Wall Street expectations.

Starting with the upstream operations, worldwide production (on an oil-equivalent basis) was down about 7% and unchanged sequentially. U.S. production was down about 18%, while international production slipped 2%. Adjusting those numbers for property sales, weather issues, and other items makes the results look less bad, but still not good. On this adjusted basis, U.S. production was down 8% and international production was up 3%.

Despite the lower production levels, pricing was still strong for both oil and natural gas. Consequently, exploration and production income from the U.S. fell 10% while international income rose 44% -- leading to an overall 21% increase in consolidated exploration and production earnings.

The refining and marketing business was even worse. Lower margins here and abroad coupled with higher downtime at refineries led total refining and marketing income to drop by about 36% from last year.

While the company's chemicals business performed well (up 85%), it's a tiny portion of the company's overall operations.

Certainly it's not all bad news at ChevronTexaco. Cash flow remains pretty robust and the company managed to repurchase over $700 million of stock.

Given yesterday's report from ExxonMobil (NYSE:XOM), ChevronTexaco's results aren't altogether surprising. In particular, it would seem to support the theme that the major oil producers are having a beast of a time trying to increase their production by meaningful amounts.

With that in mind, then, ChevronTexaco's buyout of Unocal (NYSE:UCL) makes even more sense. After all, if you can't find more oil on your own, you pretty much have to go out and buy companies that have good oil or gas reserves.

On the brighter side, even if the majors can't increase their production levels much, existing production (even if it dwindles slowly) should be enough to continue to fund dividends and buybacks so long as energy prices stay relatively high. So while investors looking for growth in the energy sector need to look in the direction of small producers like Ultra Petroleum (AMEX:UPL), big producers like ChevronTexaco can still offer an income-producing role in portfolios.

Of course, should the price of oil and natural gas decline precipitously, all bets are off with respect to any of these companies.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).