On Dec. 26, 2008, the Alerian MLP Index finally bottomed, having lost roughly half its value amid a collapse in commodity prices and the worst financial crisis since the Great Depression.

In the subsequent three and a half years, the benchmark has almost doubled investors’ money, generating almost twice the return of the S&P 500 over the same period. However, this impressive performance was barely a third of the return posted by the master limited partnerships (MLP) in our model Portfolios. In fact, the Alerian MLP Index produced less than half the return of our favorite closed-end mutual fund, Kayne Anderson Energy Total Return (NYSE: KYE).

Thus far in 2012, our Portfolio holdings have managed to outperform the Alerian MLP Index, though our returns have moderated from prior years. The model Portfolios found themselves in the same place in fall 2011, when the Alerian MLP Index rallied into year-end, transforming a minimal gain into a total return of 14 percent.

Is another rally in store for MLPs this year? With valuations on many names appearing overextended, the Alerian MLP Index has lagged the S&P 500 by about 9 percentage points. Meanwhile, many upstream MLPs have seen their unit prices decline amid weak prices for oil, natural gas and natural gas liquids (NGL). Elliott covered this trend at length in the August issue.

Distribution coverage ratios among upstream operators and MLPs that own natural gas-processing assets have also come under pressure because of weak commodity prices and challenges hedging against the sharp decline in NGL prices that occurred between April and June 2012. Peter Staas covered the challenges facing gas plants in the most recent issue of MLP Investing Insider, Processing Second-Quarter Results.

MLPs that own coal-related assets also suffered a diminution in distributable cash flow, as the price of domestic thermal coal remained under pressure and producers curtailed output because of electric utilities’ elevated inventories. We discussed these headwinds at length in the May 14 installment of MLP Investing Insider.

Ironically, our two worst-performing Portfolio holdings this year are midstream operators, a group usually renowned for their consistency and safety.

Buckeye Partners LP (NYSE: BPL) earlier this year broke its string of 31 consecutive quarterly distribution increases and failed to generate enough cash flow to fully cover its second-quarter payout. Aggressive Portfolio holding Eagle Rock Energy Partners LP (NSDQ: EROC) disappointed investors after volatile NGL prices prompted the MLP to maintain distribution. Although management reassured investors about the safety of the firm’s quarterly payout, the market punished the MLP for failing to raise its distribution.

Meanwhile, MLPs continue to enjoy extraordinarily favorable conditions for financing the construction and acquisition of new assets. For example, Enterprise Products Partners LP (NYSE: EPD) last month sold 30.5-year bonds with a coupon yield of only 4.45 percent and three-year notes with a yield of 1.25 percent–impressive placements from a company that has a BBB- credit rating from Fitch.

Equity offerings and credit facility extensions have been no less successful. By and large, MLPs have avoided near-term debt maturities that would make them vulnerable to a sudden tightening of credit conditions.

MLPs’ pipelines of new projects also remain robust. Despite volatile energy prices, North American exploration and production firms continue to ramp up drilling activity in oil- and liquids-rich plays, overwhelming existing midstream capacity. All this adds up to a bull market for MLPs, which continue to book capacity commitments on infrastructure projects well in advance of construction.  

As long as MLPs enjoy access to inexpensive capital and an abundance of growth projects, the torrid distribution growth of recent years should continue. However, you should also remember that even the most stolid MLPs will occasionally suffer from lumpy results and that the group will sometimes take a breather when market sentiment shifts.

We expect our Portfolio holdings to build wealth for investors as long as the underlying businesses continue to perform. In this issue, we evaluate how our Portfolio holdings fared in the second quarter and analyze two of the latest MLPs to go public.

In This Issue

The Stories

1. Here’s our take on how our Portfolio holdings fared during the second quarter of 2012. See Earnings Cavalcade.

2. The pipeline of potential MLP initial public offerings remains at an all time high. Here’s our assessment of two of the newest publicly traded partnerships. See Our Initial Take on Initial Public Offerings.

The Stocks

Buckeye Partners LP (NYSE: BPL)–Buy < 60 in Conservative Portfolio
Enterprise Products Partners LP (NYSE: EPD)–Buy < 50 in Conservative Portfolio
Genesis Energy LP (NYSE: GEL)–Buy < 30 in Conservative Portfolio
Magellan Midstream Partners LP (NYSE: MMP)–Buy < 70 in Conservative Portfolio
Spectra Energy Partners LP (NYSE: SEP)–Buy < 33 in Conservative Portfolio
Sunoco Logistics Partners LP (NYSE: SXL)–Buy < 35 in Conservative Portfolio
DCP Midstream Partners LP (NYSE: DPM)–Buy < 40 in Growth Portfolio
Eagle Rock Energy Partners LP (NSDQ: EROC)–Buy < 12 in Growth Portfolio
Energy Transfer Partners LP (NYSE: ETP)–Buy < 50 in Growth Portfolio
Regency Energy Partners LP (NYSE: RGP)–Buy < 29 in Growth Portfolio
Targa Resources Partners LP (NYSE: NGLS)–Buy < 39 in Growth Portfolio
Teekay LNG Partners LP (NYSE: TGP)–Buy < 41 in Growth Portfolio
Legacy Reserves LP (NSDQ: LGCY)–Buy < 32 in Aggressive Portfolio
Mid-Con Energy Partners LP (NSDQ: MCEP)–Buy < 26.50 in Aggressive Portfolio
Navios Maritime Partners LP (NYSE: NMM)–Buy < 20 in Aggressive Portfolio
Vanguard Natural Resources LLC (NYSE: VNR)–Buy < 30 in Aggressive Portfolio
Hi-Crush Partners LP (NYSE: HCLP)–Buy < 21 in How They Rate
EQT Midstream Partners LP (NYSE: EQM)–Buy < 28 in How They Rate