March 5 (Bloomberg) -- Talisman Energy Inc., the Canadian explorer with reserves in North America, the North Sea and Southeast Asia, said fourth-quarter profit rose 83 percent as derivative contracts shielded the company from falling prices.

Net income climbed to C$1.2 billion ($940 million), or C$1.17 a share, from C$656 million, or 63 cents, a year earlier, the Calgary-based company said today in a statement. Per-share profit excluding one-time items from operations Talisman is keeping rose to 53 cents, beating by 14 cents the average of 14 analyst estimates compiled by Bloomberg.

“The company entered into a number of derivative contracts last year to protect its capital programs against a drop in prices and this contributed to very strong fourth-quarter results,” Chief Executive Officer John A. Manzoni said in the statement.

Cash flow in the period was C$1.57 billion, up 54 percent on “realized gains on derivative contracts,” the company said.

Sales after payment of royalties fell 7 percent to C$1.85 billion from C$1.99 billion. Talisman netted C$25.40 a barrel of oil in the fourth quarter after hedging gains, royalties, transportation and operating costs, 51 percent less than a year earlier. Its net on natural gas rose 1.6 percent to C$4.46 per thousand cubic feet as Talisman sold the fuel at higher prices.

Oil futures traded in New York sank 56 percent in the quarter, the biggest decline on record. Gas fell 24 percent.

The company completed five wells in the Marcellus Shale formation in the eastern U.S. that confirm its expectations for output and cost, Chief Executive Officer John Manzoni said today on a conference call with financial analysts.

North Sea Rates

Some costs are falling as drilling slows because of lower oil and gas prices, Manzoni said. Day rates for North Sea supply vessels have fallen 50 percent, and Talisman has negotiated 10 percent cuts with some contractors, he said.

“We’re seeking significant reductions and we expect to see more in various locations across the world,” he said. Some general-purpose rigs in North America have dropped 30 percent, with 15 percent to 25 percent declines in Southeast Asia, he said.

A decline in commodity prices at the end of 2008 resulted in a 14 percent drop in proved reserves to the equivalent of 1.43 billion barrels of oil, using U.S. Securities and Exchange Commission accounting rules, Talisman said. Reserves, calculated at the average annual price that’s to be used next year, fell 2.9 percent to 1.61 billion barrels.

Production from operations Talisman is keeping rose 2.7 percent to average 422,000 barrels a day in the fourth quarter.

Talisman fell 10 cents to C$11.38 in trading on the Toronto Stock Exchange. The stock has dropped 6.6 percent this year.

2008 Profit

Full-year net income advanced 69 percent to a record C$3.5 billion, “reflecting a $1.2 billion after-tax gain on held-for- trading commodity derivative contracts and higher commodity prices” in the first half, Talisman said.

The company said yesterday it agreed to sell assets in southeast Saskatchewan and Montana to TriStar Oil & Gas Ltd. and Crescent Point Energy Trust for about C$720 million in cash. It raised C$1 billion last year by selling reserves that produced the equivalent of 12,000 barrels of oil a day.

Production averaged 432,000 barrels of oil equivalent a day in 2008, a 4 percent decline from a year earlier, according to today’s statement.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: March 5, 2009 16:13 EST