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CALGARY, Alberta (Reuters) - Canadian Oil Sands Trust units plunged as much as 12 percent on Friday after the largest owner of the Syncrude Canada oil sands joint venture said its payout could drop by more than half after it converts to a traditional corporation.
Its units were off C$3.10, or 11 percent, at C$25.31 on the Toronto Stock Exchange at midday on Friday after earlier touching C$25.06. More than 7.5 million units changed hands, nearly five times the average volume over the past three months.
In its 2011 budget details, Canadian Oil Sands said it expects to pay a first-quarter dividend of 20 Canadian cents a share. That is down from its October quarterly distribution of 50 Canadian cents a unit.
"It's a bigger dividend cut than, clearly, everybody was expecting," said Randy Ollenberger, an analyst at BMO Capital Markets, who downgraded the trust's units to "market perform" from "outperform".
"The street was assuming (the dividend) would be 35 cents and we'd been anticipating 25 cents so even relative to us it was more," Ollenberger said.
Canadian Oil Sands, which owns 37 percent of Syncrude, plans to convert to a corporation from an income trust at the end of the year.
Ottawa changed the rules governing income trusts in 2006, eliminating their tax advantages starting in 2011 and prompting many to convert to corporations. Under their structure, trusts paid out the bulk of their cash to unit holders and those payouts were taxed.
Along with unexpectedly large cut in its payout, Canadian Oil Sands said in its budget forecast released late on Thursday that it expects its share of Syncrude's 2011 production to average around 110,700 barrels per day, below what some analysts had expected.
As well, it expects capital spending of C$927 million ($918 million) next year, higher than most forecasts.
"We have been cautioning for some time regarding the risk that Syncrude (capital expenditures) would be a negative surprise and put extra pressure on distribution/dividend cuts." Andrew Potter, an analyst at CIBC World Markets, wrote in a note to clients.
UBS Securities Chad Friess downgraded the units to "sell" from "neutral" with a target of C$26, down from C$28, in part because of Syncrude's rising operating costs and higher than expected spending.
Reporting by Scott Haggett and Jeffrey Jones; editing by Rob Wilson