* Q1 earnings from operations $0.16/shr vs est $0.21
* Cash flow up 5 pct at $851 mln
* Cuts 2012 capital spending plan to $3.6 bln
* Takes writedown of $248 mln on Yme
* Shares fall as much as 4 pct
By Bhaswati Mukhopadhyay and Jeffrey Jones
May 1 (Reuters) - First-quarter profit at Talisman Energy Inc fell short of estimates as natural gas prices slumped to decade lows, which prompted the Canadian oil and gas producer to cut its full-year budget by 10 percent as it pulls more cash out of dry gas operations.
Talisman also wrote down the value of its troublesome Yme project in Norway by $248 million and removed it from its production forecasts as problems in readying the platform for the North Sea operation persisted.
It is now a year behind schedule as the company and its contractor work out a series of bugs.
The company's shares were off 35 Canadian cents, or 3 percent, at C$12.57 on the Toronto Stock Exchange in late-afternoon trading. They have lost nearly 45 percent of their value in the past year.
"There is disappointment with the fact that the company is forced to cut back spending on dry gas plays even though I think it is a prudent move," analyst Robert Bellinski of Morningstar said.
The company lowered its 2012 budget to about $3.6 billion, and said production would be little changed from the prior year. It had earlier forecast flat to 5 percent growth.
"I see low-single digit production growth in 2013 and 2014. I don't see where they are going to get additional production growth," Morningstar's Bellinski said.
Chief Executive John Manzoni told analysts the company has struggled a few issues that have weighed on the stock, including depressed gas prices and some operational "stumbles" at the end of 2011.
In the five years since he became CEO, Manzoni refocused much of the North American business on shale plays, including the Marcellus in the U.S. Northeast and Montney in British Columbia.
He cautioned against becoming "panicked" over gas prices, saying the assets will pay off handsomely when the market eventually recovers.
Meanwhile, Talisman is examining potential deals to reduce its exposure to the North Sea while lining up exploration opportunities in Papua New Guinea, Kurdistan and other locales and concentrating on higher-value liquids-rich gas.
"You don't move a portfolio of this scale, of this spread, overnight. You can't just flip a switch and move stuff. But what I would say to you is ... we're not sitting idle, fat and happy. We're examining many, many options," Manzoni told analysts.
Analyst Michael Dunn of FirstEnergy Capital Corp said the stock is below the level at the time Manzoni became CEO, but gas prices are several times lower and the company has a clearer strategy than it did before his tenure began.
"Reliability on the North Sea, which was an asset built up prior to his (Manzoni's) getting there, is weighing on the stock, as are North American natural gas prices. I don't know if you can blame him for the outcome of either," Dunn said.
Manzoni's investments in the gas-liquids-rich Eagle Ford area of Texas are paying off better than expected, the analyst said.
Talisman, like Chesapeake Energy Corp, Encana Corp and Progress Energy Resources Corp, has been cutting back on dry gas drilling as prices for the fuel fell 40 percent in January-March from a year ago.
(Companies cut natgas output )
In the first quarter, Talisman earned $291 million, or 28 cents per share, compared with a net loss of $326 million, or 32 cents per share, a year earlier.
Earnings from operations rose more than 6 percent to $167 million, or 16 cents per share. Analysts on average expected 21 cents per share, according to Thomson Reuters I/B/E/S.
Cash flow -- a glimpse into the company's ability to fund development -- rose 5 percent to $851 million, or 83 cents per share.
Production rose 4 percent to average 462,000 barrels of oil equivalent per day.