A handful of key takeaways have emerged this earnings season that bode well for the future:

1. The master limited partnerships (MLP) in our model Portfolio covered their distributions comfortably in the most recent quarter; and

2. Our favorites continue to strengthen their balance sheets and fuel future growth by taking advantage of extraordinarily low borrowing costs in the bond market, issuing equity at elevated unit prices and inking credit agreements at favorable terms.

“By the Numbers” shows how our Portfolio holdings stack up after another quarter of results.

Source: Bloomberg, MLP Profits

Only three Portfolio holdings have bonds that mature within the next two years, and these maturities don’t present any significant refinancing risk. Growth Portfolio holding Energy Transfer Partners LP (NYSE: ETP), for example, must roll over $458 million in bonds–about 4.1 percent of its current market capitalization. The MLP should be able to replace this capital with bonds offering even better terms.

Conservative Portfolio holding Enterprise Products Partners LP’s (NYSE: EPD) $1.7 billion in bond maturities likewise represents only 3.7 percent of the blue-chip MLP’s market cap. Kinder Morgan Energy Partners LP (NYSE: KMP) should reduce its interest costs after refinancing the $1.45 billion (4.9 percent of market cap) worth of bonds that will mature in the next two years.

Our favorite MLPs also posted strong distribution growth last year–the best indicator of a company’s health. Energy Transfer Partners was the lone Portfolio holding that failed to hike its payout in 2011, though the pending acquisition of a pipeline system in Florida should enable the firm to increase its distribution in 2012.

Growth Portfolio holding DCP Midstream Partners LP hiked its distribution for the fifth consecutive quarter, increasing the payout covering the final three months of 2011 by 1.6 percent. On the year, the master limited partnership (MLP) boosted its distribution by 5.3 percent.

DCP Midstream Partners’ full-year cash flow covered the distribution by a solid 1.1-to-1 ratio, which was in line with management’s guidance.

Cash flow from the MLP’s natural gas services segment dipped slightly in the fourth quarter, largely because of maintenance and environmental remediation.

However, acquisitions and expansion projects enabled DCP Midstream Partners’ NGL logistics operations to more than quintuple its cash flow from year-ago levels. Much of DCP Midstream Partners’ recent growth stems from a focus on expanding its capacity to handle natural gas liquids (NGL). During the fourth quarter, the MLP completed the expansion of its Wattenberg NGL pipeline and began construction on a new NGL processing plant in the Eagle Ford Shale.

The wholesale propane business also performed surprisingly well, as higher margins offset the impact of warmer weather.

Management also announced an accretive “drop-down” transaction from its general partner, DCP Midstream LLC, itself a 50-50 joint venture between ConocoPhillips (NYSE: COP) and Spectra Energy (NYSE: SE).

DCP Midstream Partners purchased the remaining 66.7 percent interest in the Southeast Texas Joint Venture, giving the firm full ownership of 675 miles of natural gas pipelines, three natural gas processing plants and 9 billion cubic feet of natural gas storage capacity. The deal will close by the second quarter of 2012.

Additional drop-down transactions from DCP Midstream LLC, which owns 60 processing plants, 12 fractionators and more than 60,000 miles of pipelines, could super-charge the MLP’s distribution growth in coming years. In fact, the general partner’s midstream operations produce about 375,000 barrels of NGLs per day, about 18 percent of the NGLs produced by US processing plants.

We also like management’s strategy of increasing DCP Midstream Partners’ exposure to fee-generating businesses, an effort that will reduce the firm’s sensitivity to fluctuations in commodity prices.

Valuation remains our sole concern with DCP Midstream Partners. The stock’s recent trading history resembles that of a momentum play, not a vehicle for building wealth over the long term. Buy DCP Midstream Partners LP when the units dip to less than 40.

Aggressive Portfolio holding Legacy Reserves LP reported solid fourth-quarter and full-year results. In 2011 the upstream operator lifted 13,071 barrels of oil equivalent, up 36 percent from the prior year. This upsurge in production stemmed from the $136.7 million in acquisition that Legacy Reserves closed last year and the $71.6 million that the firm plowed into drilling in the firm’s core acreage in the Permian Basin of west Texas and southeast New Mexico.

Fourth-quarter production held even with the third quarter, largely because unusually cold weather in December forced the closure of a gas processing plant and hindered trucking operations. Management indicated that operations have returned to normal, suggesting that output will snap back in the first quarter of 2012. 

In 2011 Legacy Reserves generated $2.46 per unit in distributable cash flow (DCF), enough to cover its full-year distribution by 1.14 times. Fourth-quarter DCF of $0.64 per unit covered the $0.55 distribution more than 1.16 times.

These coverage ratios are all the more impressive when you consider that the MLP uses a more conservative method to calculate DCF than the other upstream partnerships in our coverage universe.

To compute DCF, most producers add accounting charges such as depreciation and depletion to earnings and subtract maintenance capital spending, or the amount of capital needed to maintain existing wells and assets in good working order. Unlike its peers, Legacy Reserves doesn’t distinguish between capital spending on maintenance and on growth initiatives. Instead, the partnership subtracts all of its capital spending from earnings, effectively reducing its DCF and distribution coverage ratio.  

Although Legacy Reserves’ reported distribution coverage ratios are lower than those of fellow Aggressive Portfolio stalwart Linn Energy LLC (NSDQ: LINE), the former still generates ample cash flow to cover its payout.

The $71.6 million that Legacy Reserves invested in development projects last year more than doubled the $32.9 million spent in 2010 and was the largest such allocation in the MLP’s history.

Much of this capital went toward drilling vertical wells in the Permian Basin’s Wolfberry Trend, though Legacy Reserves also sank a number of test wells in the Bone Spring and Yeso plays.

The MLP has yet to disclose results from the lone horizontal well in Bone Spring, but plans to sink two additional wells there in 2012 suggest that flow rates from the first test warrant further investigation. If these wells also pan out, management estimates that its existing properties hold a drilling inventory of 15 to 20 wells that are prospective for the Bone Spring formation.

A number of producers already target the Yeso with both vertical and horizontal well completions. During a conference call to discuss fourth-quarter earnings, management indicated that the firm will monitor drilling data from other producers before deciding whether to focus on horizontal or vertical wells. In 2012 the MLP plans to drill two vertical wells in the Yeso.  

Legacy Reserves set its 2012 a capital spending budget at $62 million, a number that fell short of expectations. But the MLP has a history of boosting its investment during the year; the partnership’s 2012 capital expenditures could ultimately exceed 2011 levels.

Management is also discussing terming out its debt with its lenders. Such a move would likely involve issuing eight- or 10-year bonds and using the proceeds to pay off its shorter-term, variable rate credit lines. With these credit facilities slated to expire in 2016, this move would take advantage of favorable credit conditions, push back refinancing risk and limit the firm’s exposure to spikes in the London Interbank Offered Rate.

Equally important, if Legacy Reserves taps the bond market and pays down its credit line, the MLP would have ample liquidity to fund acquisitions.

The stock has traded sideways in recent quarters, in part because Legacy Reserves has increased its distribution at the modest annualized rate of 5 percent. New acquisitions would likely accelerate this growth rate, which would drive additional interest in the stock. We wouldn’t be surprised if Legacy Reserves announces a larger acquisition at some point in 2012.

Legacy Reserves also wins points for its liquids-focused production: Oil accounted for 78 percent of its 2011 revenue, while NGL content helped boost average price realizations on a thousand cubic feet of gas to more than double the thermal fuel’s current price. Units of Legacy Reserves currently yield 7.7 percent and rate a buy up to 32.

Linn Energy LLC (NSDQ: LINE)

Oil, natural gas and NGL producer Linn Energy LLC generated DCF of $0.94 per unit in the fourth quarter and $3.40 per unit for the full year, enough to cover the corresponding distributions a healthy 1.36 and 1.24 times, respectively. This robust cash flow growth enabled the limited liability company (LLC) to boost its distribution by 4.5 percent in 2011, to $0.69 per unit.

Linn Energy’s fourth-quarter production jumped 38 percent from year-ago levels to 425 million cubic feet equivalent per day. The upstream operator’s 2011 drilling program focused primarily on its oil- and NGL-rich acreage in the Granite Wash of Texas and Oklahoma and the Permian Basin, leading to record production growth last year. An active acquirer, Linn Energy in 2011 augmented its existing acreage with 13 acquisitions worth $1.5 billion.

Management has approved an ambitious $880 million capital spending program for 2012 that focuses primarily on liquids-rich plays. About 53 percent of the drilling budget will fund activity in the Granite Wash, while about a quarter of these allocated funds are reserved for operations in the Permian Basin. During a conference call to discuss fourth-quarter earnings, management spent a great deal of time discussing opportunities in these regions.

Granite Wash

Linn Energy’s Granite Wash holdings comprise about 50,000 net acres in the Texas Panhandle and about 25,000 net acres in Oklahoma. Much of the LLC’s recent activity has focused on the Texas portion of the play, where the company beefed up its acreage position in December 2011 by acquiring 20,000 net acres from Plains Exploration & Production (NYSE: PXP) for $600 million. This transaction added an estimated 200 horizontal drilling locations, bringing Linn Energy’s inventory to about 600–a decade’s worth of opportunities.

Natural gas produced from the Granite Wash is rich in NGLs such as ethane, propane and butane. A barrel of NGLs tends to trade at roughly half the price of an equivalent barrel of oil; with natural gas prices hovering near a decade low, “wet” gas fields offer superior economics. Depending on the location, more than half the total production from some Granite Wash wells consists of oil, NGLs and condensate, another high value liquid hydrocarbon.

Producers traditionally have used vertical wells to tap hydrocarbons in the Granite Wash. Linn Energy still has a sizeable inventory of vertical wells flowing oil in this area, but the LLC has found that horizontal drilling and hydraulic fracturing improve recovery rates.

Hydraulic fracturing involves pumping a liquid into the field under such high pressure that it cracks the reservoir rock; these channels provide a pathway for the hydrocarbons to flow into the well. Internal rates of return on Linn Energy’s wells in the Granite Wash exceed 50 percent, making stepped-up drilling in this region a reliable source of organic growth.

In the fourth quarter of 2011, Linn Energy’s production in the region averaged 86 million cubic feet per day, up 34 percent from the prior and 450 percent on a year-over-year basis. The upstream LLC drilled 29 horizontal wells in the Granite Wash last year, swelling the total of operational wells to 41 by the end of 2011. With nine rigs operating in the region, Linn Energy plans to drill 60 operated wells and participate in a total of 75 horizontal wells in 2012.  

To date, the majority of the firm’s wells have targeted the Carr and Britt intervals. But other producers have experienced success drilling in shallower formations such as the Hogshooter, Lansing, Cleveland and Tonkawa intervals. These shallower intervals also tend to contain higher volumes of oil, making them even more attractive when a barrel of oil fetches more than $100 and natural gas has slipped to less than $3 per million British thermal units.

Linn Energy began drilling its first Hogshooter well in the Texas Panhandle at the beginning of the year. Although well results likely won’t be available until April 2012, other producers have enjoyed success in this area. Should the well prove worthwhile, Linn Energy’s drilling inventory in the Granite Wash could grow significantly.

However, operations in this play face a lack of sufficient pipeline and processing capacity to support the rapid increase in NGL-rich output. Linn Energy has started to tackle this problem by constructing its own gathering system, a pipeline network that collects production from individual wells. In 2011 the company built 63 miles of gathering pipelines. Plans for 2012 call for another 43 mile of lines.

Additional compression capacity on these lines is equally important, as the flood of natural gas and NGLs entering the gathering pipeline from new wells overwhelms the flow of hydrocarbons from older, vertical wells. Expanding pipeline capacity and adding compressors reduces line pressure and boosts production from mature wells.

Permian Basin

Linn Energy has amassed more than 100,000 net acres in the oil-rich Permian Basin, including about 38,000 net acres in the highly prolific Wolfberry Trend. In the fourth quarter, the firm’s 1,300 wells in the region flowed 13,600 barrels of oil equivalent per day, up more than 40 percent from the final three  months of 2010.

The upstream LLC has identified about 400 low-risk drilling locations on its existing properties and plans to sink roughly 100 vertical wells in 2012. These inexpensive wells yield an average initial production rate that exceeds 120 barrels of oil equivalent per day.

Management is experimenting with two changes to its drilling strategy that could unlock additional production growth in the Permian Basin.

In late 2011, Linn Energy launched a pilot program to test whether tighter spacing between drilling sites would expand its inventory and improve recovery rates. Management called early test results “promising” but cautioned that additional drilling would be necessary. A shift to 20-acre spacing could double the number of potential drilling locations.

In a Feb. 23 conference call, management also told analysts that it’s closely evaluating well results from producers using horizontal wells near the company’s Wolfberry acreage. If this drilling technique generates superior returns to traditional completions, management could test horizontal wells on its leasehold.

Bakken Shale

Although Linn Energy has allocated only 6 percent of its 2012 capital budget to the Bakken Shale, the firm’s initial steps into this prolific, oil-rich play could provide a platform for future growth.

Frenzied drilling in the Bakken Shale has enabled North Dakota to become the fourth-leading oil producer in the US. Some of the wells drilled in this prolific onshore field are among the biggest domestic gushers in decades. In fact, the state’s annual oil output has increased more than tripled over the past five years.

Source: Energy Information Administration

Rather than splash out on expensive acreage or settle for land on the Bakken’s periphery, Linn Energy acquired non-operator interests in prime locations. This strategy provides the upstream LLC with experience in the region without taking on too much expense. In fact, Linn Energy’s average working interest in wells in the Bakken wells is just 7 percent.

By the end of 2011, the firm had participated in 65 horizontal wells, an investment that yielded 3,500 barrels of oil equivalent per day. As management grows more comfortable with the play and its economics, we wouldn’t be surprised if Linn Energy made a larger acquisition or sought to operate its own wells.

Management’s Outlook

Management’s initial forecast called for production to increase by roughly 40 percent in 2012, with about half this growth coming from drilling and the other half coming from acquisitions. Based on the midpoint of its production estimate, management expected DCF to cover the full-year payout 1.15 times in 2012.

However, this early guidance was soon rendered obsolete when Linn Energy announced the $1.2 billion acquisition of BP’s (LSE: BP, NYSE: BP) acreage in the natural gas- and NGL-laden Hugoton Basin. This transformational deal, which is expected to close before the end of March, adds about 800 drilling locations to the firm’s inventory and follows Linn Energy’s long-standing strategy of acquiring long-lived assets at favorable prices.

The property’s 2,400 operated wells already yield about 110 million cubic feet of energy equivalent per day and sport an average annualized decline rate of about 7 percent. About 500 of these wells are candidates for recompletion, a process that involves performing basic maintenance on the wellbore and potentially deepening the shaft to target a new formation.

Linn Energy will also take over BP’s Jayhawk gas processing plant that separates NGLs from the methane stream. This facility was constructed in 1998 and currently operates at only 41 percent of its nameplate capacity, leaving ample scope to accommodate additional production when Linn Energy steps up drilling.

The acquisition won’t affect the LLC’s exposure to commodity prices, either; the firm has hedged 100 percent of the property’s expected natural gas output and 68 percent of its projected NGL production through 2016. This combination of swap contracts and put options protects the firm’s cash flow against fluctuations in commodity prices while leaving room for potential upside if natural gas prices strengthen in 2015 and 2016.

At $1.2 billion, the Hugoton acquisition is the second-largest deal in Linn Energy’s history and only $300 million shy of the $1.5 billion in transactions announced in 2011.

This deal will be immediately accretive to firm’s DCF and should accelerate distribution growth. In 2007-08, the last time Linn Energy was completing acquisitions of this magnitude, the upstream LLC grew its annual payout at a double-digit pace. Buy Linn Energy LLC under 40.

Penn Virginia Resource Partners LP (NYSE: PVR)

Aggressive Portfolio holding Penn Virginia Resource Partners LP owns and manages 804 million tons of coal reserves, primarily in Central Appalachia. The firm’s portfolio also includes producing properties in Northern Appalachia, the Illinois Basin and New Mexico.

About 89 percent of the coal that Penn Virginia Resource Partners’ properties produce is steam coal, the kind used in power plants. But the company’s mines in Central Appalachia contain high-grade metallurgical coal, the varietal used in steel production.

Penn Virginia Resource Partners doesn’t mine coal; instead, the MLP leases coal-producing properties to coal mining firms in exchange for royalties. These 10- to 15-year agreements usually involve a guaranteed minimum plus a fee based on the value of the coal mined on the partnership’s properties. This approach limits the MLP’s downside exposure to fluctuations in coal prices and generates a reliable source of DCF.

The partnership’s natural gas gathering and processing assets include 4,200 miles of gathering pipelines and seven processing facilities.

Gathering pipelines collect gas from individual wells. Drilling activity slows when gas prices are weak, which means lower volumes of gas travel through the gathering system and fewer wells are hooked up to the system. But gathering activity at Penn Virginia Resource Partners’ key assets hasn’t slowed too much because the regions it serves are rich in higher-value NGLs such as ethane, propane and butane.

This unique business mix has enabled the MLP to boost its distribution in four consecutive quarters. Penn Virginia Resource Partners grew its full-year cash flow by 23 percent in 2011, though a $26.9 million provision for “reserve replacement capital” meant that DCF increased by only 1.6 percent, to $143.8 million. Even with this provision, DCF still covered the full-year distribution by a 1.06-to-1 margin.

Average daily throughput from the company’s midstream natural gas system climbed to 495 million cubic feet per day, up 39.4 percent from the year earlier. Fourth-quarter volumes averaged 595 million cubic feet per day, as Penn Virginia Resource Partners continues to expand its asset base in the capacity-constrained Marcellus Shale. Boasting the lowest cost of production among shale gas plays, the Marcellus Shale should remain a hot spot for drilling activity.

The MLP in 2011 spent $106.4 million on internal growth projects that will bolster 2012 revenue. Penn Virginia Resource Partners has completed or soon will complete a series of major projects, including an expanded gas gathering system in the Marcellus Shale, a pipeline to deliver water for hydraulic fracturing, and an expanded gas-processing facility in Granite Wash. Capacity on all these projects is booked under long-term contracts that ensure a steady stream of fee-based revenue.

Meanwhile, coal royalty tons increased 11.3 percent in 2011, though growth dissipated in the fourth quarter. Coupled with a 19 percent uptick in the royalty rate per ton, Penn Virginia Resources’ coal business enjoyed a solid year. That being said, depressed natural gas prices and an unseasonably warm winter should combine to weigh on coal volumes and price realizations, though 84 percent of expected production from its properties is already committed under contracts.

Management forecasts calls for the MLP to generate $260 million to $280 million in 2012, with expansion projects in its midstream segment offsetting any weakness in the coal business. Yielding 8.2 percent, Penn Virginia Resources Partners LP rates a buy up to 29.

Targa Resources Partners LP (NYSE: NGLS)

Targa Natural Resources Partners posted DCF of $107.2 million in the final three months of 2011, covering its quarterly distribution by a hefty 1.6-to-1 margin. The MLP’s cash flow surged 25 percent from year ago levels, as $300 million worth of new assets came onstream. Management also announced another $1 billion worth of growth projects for 2012 and 2013.

After hiking its fourth-quarter distribution by 3.4 percent in January, Targa Natural Resources Partners increased its distribution by 10 percent last year. We expect this growth to accelerate as new projects come online in coming years.

Targa Resources Partners butters its bread with NGL-related infrastructure and has taken full advantage of favorable pricing and runaway demand for new infrastructure.

Fourth-quarter operating margin in Targa Natural Resources Partners’ field gathering-and-processing segment surged 25.1 percent. Throughput at the MLP’s four processing plants ticked up 4.6 percent, NGL output rose 4.6 percent, and natural gas sales increased 13.4 percent. NGL prices, meanwhile, were up 27 percent, offsetting the 6 percent drop in average realized gas prices of $3.32 per million British thermal units.

Coastal gathering and processing posted results that were even more impressive: Operating margin soared by 59.1 percent, as NGL volumes at the three processing facilities increased by 6.4 percent and natural gas sales rose 12.2 percent. Condensate sales tripled in volume. Strong pricing for condensate and NGLs offset weaker pricing for dry gas ($3.43 per million British thermal units).

Targa Resources Partners’ logistics segment posted a 21.5 percent increase in operating margin, benefiting from a larger pool of assets that generated higher levels of fee income.

The marketing and distribution business generated operating margin that was roughly flat with year-ago levels, largely because mild weather reduced wholesale propane sales. Meanwhile, lower prices offset higher natural gas volumes.

NGL pricing remains a wild card to keep an eye on. Throughput gains from new assets should offset any headwinds related to NGL pricing; management projects that the distribution will grow by 10 percent to 15 percent, noting that much of its cash flow hinges on demand.

In a conference call with analysts, CEO Joe Bob Perkins affirmed that Targa Resources Partners’ 2012 guidance is “not impacted by…exposure to dry gas production.” Perkins also stated that a $0.25 per gallon drop in ethane prices would hit cash flow by about 5 percent in 2013 and “later years.”

Ethane is a key substitute for naphtha and other petroleum derivatives in the plastics industry. The sudden abundance of North American ethane has spurred plans to build new ethane and propane crackers. NGL exports have prevented the market from becoming oversupplied.

However, analysts at Goldman Sachs (NYSE: GS) recently posited that ethane production is outpacing demand growth, creating the potential for a supply overhang and lower prices. Whether this scenario will come to fruition remains to be seen. Yielding only 5.7 percent after the recent rally, units of Targa Resources Partners don’t reflect this risk.

With no debt maturities to 2015 and $1.1 billion of undrawn credit, has ample liquidity to take advantage of growth opportunities. Targa Resources Partners LP rates a buy when the stock dips to less than 35.

Teekay LNG Partners LP (NYSE: TGP)

Growth Portfolio holding Teekay LNG Partners reported fourth-quarter DCF of $44.1 million, up 12 percent from a year ago. These results covered the partnership’s quarterly distribution of $0.63 per unit but seemingly left little margin for error.

For many MLPs, such a thin coverage ratio would be construed as a red flag. But Teekay LNG Partners’ contract-backed income stream limits its exposure to prevailing commodity prices or economic conditions. In fact, management disclosed plans to increase the MLP’s quarterly distribution by 7 percent, to $0.675 per unit, in the first quarter of 2012.  

Teekay LNG Partners owns a fleet of 20 ships that transport liquefied natural gas (LNG), five vessels that carry liquefied petroleum gas (LPG), and 11 conventional oil tankers. All its existing ships are contracted under long-term time charter arrangements at fixed day-rates; the MLP’s LNG carriers have an average of 16 years remaining on their fixtures, while the average outstanding contract for its LPG and conventional oil tankers stands at 15 years and 10 years, respectively.

Day rates for oil tankers continue to languish. Although demand for these vessels remains solid, a glut of newly constructed vessels has led to an oversupply of capacity, depressing day rates to levels that make it difficult for many operators to turn a profit. These headwinds, coupled with declining ship values, have forced General Maritime and a number of tanker owners to declare bankruptcy.

But these headwinds won’t push Teekay LNG Partners on the rocks; conventional oil tankers only account for a small percentage of the firm’s DCF, and most of the MLP’s vessels are booked under long-term time charters at fixed day rates. When the contracts on Teekay LNG Partners’ oil tankers roll off five to 10 years from now, the supply-demand balance in this shipping market should have normalized.

Meanwhile, Teekay LNG Partners’ flagship business is booming. With a host of LNG export terminals coming onstream in Australia and Africa, global LNG supply is expected to grow at an annualized pace of 4.4 percent between 2011 and 2015.

After 2015, a number of new liquefaction facilities will come online in Australia, Russia and the Middle East. Most analysts also expect the US and Canada to export LNG toward the end of the decade. All told, global LNG supply is expected to expand at an average annualized rate of 7.7 percent between 2015 and 2020.

Demand is rising to meet supply. In 2011 China’s LNG import volumes jumped by almost one-third. Meanwhile, Japan imports all of its natural gas supply via LNG tanker.  Since the disaster at Fukushima Daiichi in spring 2011, Japan has closed the majority of its nuclear reactors for evaluation and maintenance, forcing the nation to ramp up its LNG imports. Germany’s decision to shutter all of its nuclear power plants over the next 10 years likewise bodes well for the global LNG market.

Demand for LNG tankers is booming, but most of these specialized vessels are booked under long-term deals associated with a particular export facility. Day rates in the spot market now exceed $140,000, up from about $65,000 in early 2011 and $20,000 in mid-2010.

Teekay LNG Partners’ existing fleet has limited exposure to these skyrocketing day rates, as these vessels are booked under long-term contracts. But the tight supply-demand balance in the market for LNG tankers makes fleet additions worthwhile.

In 2011 the MLP added a 33 percent equity interest in three LNG carriers last year and a 100 percent interest in three LPG carriers. All six of these vessels are booked under long-term deals that produce steady, reliable cash flows and the total value of those contracts exceeds $200 million.

In the third quarter of 2011, Teekay LNG Partners announced a joint venture with Japan-based Marubeni Corp (Tokyo: 8002) to purchase six LNG tankers from AP Moller Maersk for USD1.3 billion. This table outlines the current status of these six vessels:

Source: Teekay LNG Partners LP

The majority of these ships are booked under long-term charters, but two of the carriers–the Maersk Magellan and Maersk Methane–will come off contract in the next few years, allowing Teekay LNG Partners to take advantage of the tight market. In fact, the Maersk Methane’s contract was slated to expire in early 2012, but the joint-venture partners secured a three-year fixture for the vessel at a day rate of $130,000.

In 2012 Teekay LNG Partners’ interest in these six ships should generate $40 million in DCF, equivalent to a quarter’s worth of distributable cash flow.

Even better, the JV partners borrowed 80 percent of the cash needed to fund this acquisition, limiting Teekay LNG Partners’ required equity investment to $138 million. The MLP raised almost $180 million in a secondary unit offering at the end of 2011.

Based on management’s proposed higher distribution, units of Teekay LNG Partners now yield about 6.9 percent–well above the rate of return offered by the Alerian MLP Index.

With an above-average yield, high cash flow visibility and ample opportunity to grow through acquisitions, Teekay LNG Partners LP is a steal under 41.