Canada got rid of its version of master limited partnerships, known as trusts, years ago. But the MLPs sponsored on the US side of the border by Canadian pipeline companies have been red hot of late, fueled by speculation that their parents will accelerate asset dropdowns.

Last week, TC PipeLines (NYSE: TCP) outperformed all other MLPs, rising more than 20%. Another partnership sponsored by a Canadian midstream giant, Enbridge Energy Partners (NYSE: EEP), rallied 10%.

TC PipeLines is an affiliate of TransCanada (NYSE: TRP, TSE: TRP). TransCanada’s network of natural gas pipelines covers over 35,000 miles throughout Canada, the US and Mexico. TransCanada also has approximately 400 billion cubic feet of natural gas storage capacity.

TransCanada’s assets include the Keystone Pipeline system that transports oil from the oil fields of Alberta and North Dakota to refineries in the US. But most people are familiar with TransCanada because of its proposed Keystone XL pipeline expansion project. This pipeline has run into fierce opposition from global warming activists, delaying the required US State Department approval.

TransCanada shares have continued to rally over the past week as rumors emerged that several activist hedge funds are viewing the company as a break-up candidate to unlock shareholder value. This was also apparently the catalyst behind TC Pipelines’ 15% surge late Friday, although traders tempered their enthusiasm Monday, discounting the stock 6%.

Enbridge Energy Partners is sponsored by Calgary-based Enbridge (NYSE: ENB, TSE: ENB). Enbridge provides the single largest conduit of crude oil into the US, moving 13% of US crude imports.

Enbridge Energy Partners has thousands of miles of oil and gas pipelines, and a dominant position in the Bakken. Of the 583,000 barrels per day (bpd) of pipeline export capacity from the Bakken in 2013, Enbridge Partners owned 355,000 bpd (61 percent). EEP also has a major presence in Texas, moving 15% of Texas natural gas production via its 11,200 miles of natural gas gathering and transmission pipelines, 26 processing plants and 10 treating plants.

EEP surged last week on Enbridge’s proposal to sell to it for $900 million in cash and equity the US portion of the Alberta Clipper crude pipeline linking Alberta to Wisconsin. The deal would be immediately accretive to EEP’s distributable cash flow following the summertime restructuring of the incentive distribution rights it pays to Enbridge.

Meanwhile, last week’s two biggest losers were partnerships we have been skeptical of in the past. Viper Energy Partners (NASDAQ: VNOM) dropped 12% for the week. VNOM is a spinoff from rapidly-growing Permian Basin oil producer Diamondback Energy (NASDAQ: FANG), and its initial public offering on June 18 generated very strong demand.

Viper Energy Partners has a business model that hadn’t been attempted previously with an MLP. The partnership owns mineral rights on 14,804 acres in the Permian Basin, with an average 21% royalty interest on the oil and gas production. It intends to grow distributions by acquiring additional mineral rights.

The IPO was projected to price near $20. But demand proved extremely strong, and units priced at $26, opened at $31.50, then jumped above $34 during the first morning of trading. We warned readers on June 24 (Stingy Viper Soars, Foresight Found Lacking): “Given the commodity risk associated with Viper Energy Partners’ business model and the now paltry 3.2% yield, this security could prove quite poisonous should commodity prices fall or interest rates rise.”

The good news is that the projected yield has since risen to 4.2%. That bad news is that this is because the unit price has dropped 18% since the IPO, the decline accelerating last week after the partnership announced a secondary offering of 3.5 million units.

The second biggest loser of the week was Eagle Rock Energy Partners (NASDAQ: EROC). Nearly every month during the joint monthly web chat for subscribers of The Energy Strategist and MLP Profits, someone asks if EROC is a bargain. The unit price has steadily eroded since topping out above $12 in 2011. We have been asked whether this looked like a value at $10, $8, and $5 (in the July 8th chat), but our advice has been to wait and see before jumping into this one. This is a case where we lost faith in management’s guidance, and once that happens the trust must be earned back.

Investors pummeled EROC after it announced in April that it was temporarily suspending distributions, and the free-fall continues. Last week EROC shed another 7.7%, and is now down 34.6% year-to-date, making it the biggest loser among MLPs thus far in 2014.

But EROC has a number of producing oil and gas wells in some of the most productive regions of the country. There is value here, but it will take a few more quarters of stable financial performance before I would be comfortable taking a position. For now, the partnership remains too risky for most MLP investors.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

TransCanada in Hedge Fund Crosshairs   

The source of those rumors about TransCanada and hedge funds was a Sept. 18 Reuters story reporting that Daniel Loeb’s Third Point was one of several activist funds canvassing top TransCanada investors about a potential breakup.

This is a scenario that has been out there for a while. In June, a Citigroup analyst suggested the company sell its power generation business and transfer the remainder of its US natural gas pipelines to TCP. The last step is one TransCanada is already planning to carry out over the next few years.

The company responded Friday with a brief defense of its current plans, a potential sign of pressure by shareholders. More headlines are likely: TransCanada’s bond yields rose Monday as creditors worried that the hedge funds would force the company to increase its debt.

If nothing else, the activism could expedite the timetable for asset dropdowns into TC PipeLines, which would allow TransCanada to unload its underutilized gas pipelines at attractive earnings multiples, given the higher valuations prevailing among MLPs. But big hedge funds like Third Point seldom single out a quarry unless they believe there is a likelihood of bigger changes and  more upside. Buy TRP below $62.      

Notice to Subscribers

Starting with the next issue of MLP Profits, and after discussions dating back to April, we will replace the current safety rating system with a new risk assessment methodology that will allocate recommendations to the Aggressive, Growth and Conservative portfolios based on the reliability of the cash flows underpinning the distributions.

In practical terms, the Conservative Portfolio will be the equivalent of a safety rating of 4 or a high-3, the Growth Portfolio will include high 2’s and the rest of the 3’s and the Aggressive Portfolio will be home to 1’s and low 2’s.

In addition to using the portfolios to convey the riskiness of a recommendation, next month we will also provide an update on two crucial risk measures for all the MLPs we recommend — their distribution coverage and debt-to-EBITDA ratios — along with commentary on other relevant risk factors.

This change will provide readers with more detailed and relevant risk information, and formalize a process we have employed to deliver superior portfolio performance over the past 16 months.

In preparation for this change, we will be removing the safety ratings on the securities included in the How They Rate table effective today. This table lists MLP securities other than those we recommend for informational purposes only.

As always, we welcome your suggestions.

— Igor Greenwald