* Q3 EPS C$0.03 vs C$1.40 a year ago
* Cont ops earnings C$0.15/shr vs forecast C$0.10
* Q3 cash flow C$0.83/shr vs C$1.65
* Boosts capex, slightly lowers production forecast
* Shares drop 0.8 percent (Recasts to add detail)
By Scott Haggett
CALGARY, Alberta, Nov 3 (Reuters) - Talisman Energy Inc TLM.TO is boosting spending on its unconventional gas holdings, raising its budget by C$900 million ($841 million) to buy and drill shale-gas properties even as it reported a 98 percent drop in third-quarter profit.
The company, Canada's No. 3 independent oil explorer, said on Tuesday that net income fell to C$30 million ($27.9 million), or 3 Canadian cents a share, down from C$1.4 billion, or C$1.40 a share, a year ago as oil and gas prices plunged, production fell and costs rose.
But Talisman is still speeding ahead with a strategic shift, concentrating on unconventional gas production and investing heavily in the massive shale plays that have revolutionized the North American natural gas business as new technology lets companies profitably tap massive reserves once thought too expensive to exploit.
To pay for its switch, the company raised its 2009 capital budget by 25 percent to C$4.5 billion to increase drilling on its shale properties and acquire new exploration lands.
"We're accelerating our shale-gas development activity as we gain confidence," John Manzoni, Talisman's chief executive, said on a conference call.
Since the beginning of the year, Talisman has bolstered its land holdings in two unconventional gas discoveries where it thinks it can produce gas for about C$4 per thousand cubic feet, making it profitable at current prices.
It said it added 90,000 acres of properties in Pennsylvania's Marcellus shale gas region, North America's largest natural gas reserve, with an estimated 1,500 trillion cubic feet of gas in place.
Talisman's production from the region has risen ten-fold since the start of the year to more than 50 million cubic feet a day.
It also boosted its land holdings in the Montney region of British Columbia, adding 80,000 acres of exploration lands and doubling holdings in the heart of the play to 166,000 acres.
"They've locked up huge land positions in both those plays," said Phil Skolnick, an analyst with Genuity Capital Markets. "They have thousands of drilling locations and the economics look really good."
Talisman's earnings from continuing operations, which exclude most one-time gains and charges, fell 76 percent to C$155 million, or 15 Canadian cents a share, from C$654 million, or 64 Canadian cents a share, in the third quarter of 2008. That surpassed the average analyst estimate for 10 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Cash flow, an indicator of Talisman's ability to fund drilling and major projects, was C$838 million, or 83 Canadian cents a share, down 50 percent from C$1.68 billion, or C$1.65 a share.
Overall production averaged 401,000 barrels of oil equivalent a day, down 9 percent from the third quarter of 2008, mostly as Talisman temporarily closed some of its North Sea operation for maintenance.
Manzoni said Talisman is targeting average production of between 423,000 and 426,000 boed for the year, a slight drop from its previous 430,000 boed forecast, because it expects to sell some conventional oil and gas properties to pay for its shale-gas plans.
The company expects that asset sale program to continue into 2010. Manzoni gave no detail, but said Talisman could shed conventional properties with "substantial existing production" and invest the proceeds into its unconventional holdings.
Talisman shares fell 18 Canadian cents to C$18.15 late afternoon on the Toronto Stock Exchange.
$1=$1.07 Canadian Additional reporting by Ajay Kamalakaran; editing by Janet Guttsman