In last week’s MLP Investing Insider, The Bad and Ugly of 2014, I reviewed the worst performing MLPs of 2014. The list was dominated by upstream MLPs (i.e., oil and gas producers).

This week I review the top performing MLPs of 2014, and once again it is dominated by a particular segment. Here are the 10 best performers for the year to date through Dec. 26, followed by commentary on the top five. Data is courtesy of MLP Data.

As I noted in a story in this week’s Energy Letter, despite the steep declines in the energy sector, 23% of the stocks in the sector did end the year with positive returns. But as I noted in that story, the top performers were dominated by MLPs — specifically midstream MLPs.

For those who need a refresher on terminology, the “upstream” segment is involved in the exploration and production of oil and gas. “Midstream” companies and partnerships are those that transfer oil and gas to markets via pipelines, rail and marine shipping, and also provide storage in the field and at the destination location. “Downstream” is the segment that refines the oil and gas into finished products (such as refiners) and/or that markets and distributes finished products.

The upstream segment is the one most exposed to commodity prices, and as a result of the drop in oil and more recently natural gas prices, this segment has been especially battered. Hedges help, but they only provide relief until they expire. As a result, many of the worst performers in the sector since the oil price decline began in July are upstream companies, and those that provide upstream support services like drilling or supplying the sand and water used in hydraulic fracturing.

Midstream, on the other hand, operates as toll collectors that earn fees whether oil prices are rising or falling. Only during an extended period of high or low oil prices are pipeline companies likely to feel significant impacts. In most cases their income is based on fixed-fee contracts, and is much more predictable than in the upstream sector. Thus, it should not be surprising that the midstream MLPs held up well during the decline, but it may be surprising that some performed as strongly as they did.

The top performing MLP of 2014 with a total return of 79.6% was Phillips 66 Partners (NYSE: PSXP). This partnership is comprised of midstream assets dropped down from its sponsor, the refiner Phillips 66 (NYSE: PSX) in a 2013 IPO.

In second place was Tallgrass Energy Partners (NYSE: TEP), another 2013 IPO. Tallgrass provides natural gas transportation and storage services for customers in the Rocky Mountain and Midwest regions of the U.S.

Western Gas Equity Partners (NYSE: WGP) was the third leading performer for 2014. WGP was formed by Anadarko to own the general partner of Western Gas Partners (NYSE: WES), all of WES’s incentive distribution rights, and a substantial limited partner interest in WES. WES, incidentally, came in 24th place among MLPs with a return of 21.2% for the year.

In fourth place was one of the two non-midstream MLPs in the Top 10. Emerge Energy Services (NYSE: EMES) achieved a 2014 total return of 55.8%. EMES is also the highest-yielding MLP on the list with an annualized yield based on the most recent quarter of 8.6%. Emerge is primarily a domestic producer and supplier of sand used for hydraulic fracturing in U.S. shale basins. As with  midstream partnerships, a substantial portion of its fees is fixed and backed by minimum customer commitments, but if some of the shale producers go under the fracking sand business will suffer. Note that the fracking sand MLPs have seen extremely volatile trading. Emerge’s entry on the list comes despite a decline of nearly nearly 60% since the end of August.

Rounding out the top five was TC Pipelines (NYSE: TCP) with a 2014 total return of 55.6%. TC Pipelines has interests in more than 5,560 miles of FERC regulated, interstate natural gas pipelines and a combined total deliverable capacity of 8.9 billion cubic feet per day (bcf/d). This infrastructure supplies approximately 8% of the United States daily gas volume.

The bottom half of the top 10 was made up of other midstream partnerships, except for Sunoco (NYSE: SUN), which had a 2014 return of 50.7%. Most of the time, “downstream” refers to the oil refining business, but in this case SUN is a bit further downstream than that. This partnership distributes motor fuel to convenience stores, independent dealers, commercial customers and distributors, and operates more than 100 convenience stores and retail fuel sites.

If your core holdings in 2014 consisted of midstream partnerships, chances are you are pleased with their performance. But 2014 is now in the rear view mirror, so in next week’s issue I will discuss the outlook for 2015.

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

Portfolio Update

Energy Transfer’s Latest Shuffle

Financial relationships within a family are often complicated, and even more so when the family is a leading group of master limited partnerships.

Energy Transfer’s latest intramural deal should make them a bit simpler, however, cementing Energy Transfer Equity’s (NYSE: ETE) role as the general partner with the most leverage to the success of its affiliates, and securing near-term distribution growth of its top affiliate Energy Transfer Partners (NYSE: ETP).

In a transaction finalized last week, ETE will acquire 40% of incentive distribution rights (IDRs) in another affiliate, Sunoco Logistics (NYSE: SXL), from ETP, bringing its stake in SXL IDRs to 90%. In exchange for the IDRs, ETE will transfer to ETP $879 million in cash, 30.8 million ETP units and ETE’s 45% stake in a Bakken crude pipeline currently in development.

ETE also gets to reduce its IDR subsidies to ETP by $55 million in 2015 and $30 million in 2016.

We continue to favor both MLPs as two of the strongest plays on the continued development of energy midstream infrastructure in the U.S. Buy ETE below $66 and ETP below $70.

— Igor Greenwald