Four of the six recommendations in the MLP Profits Aggressive Portfolio have reported third quarter results. All four amply covered their distributions for the period.

The Aggressive Portfolio offers a higher average yield than the Conservative and Growth portfolios, but most of the holdings carry slightly higher risks, typically in the form of exposure to commodity prices or drilling activity.

For much of late 2008 and early 2009 commodity exposure was a negative, but that’s changing. Crude oil prices have been rising steadily since spring, helping companies with exposure to oil production such as Aggressive Holdings Legacy Reserves LP (NSDQ: LGCY) and Linn Energy LLC (NSDQ: LINE).

With oil prices near $80 per barrel and credit market conditions improving, both are in excellent position to purchase new oil fields and hedge production for years into the future at attractive prices. Linn, for example, recently closed on its $118 million acquisition of oil-producing properties in the Permian Basin.

Although the price of natural gas has lagged that of oil, it is trading off its late-summer lows. Much of the weakness in gas prices has been focused in the spot gas market because of near-term concerns about a glut of gas in storage.

However, the 12-month natural gas strip–the average of the next 12 months of futures prices–is a far better measure of health in the gas market; it indicates the prices at which producers can hedge their output over the course of the year. The 12-month strip has recently been trading between $5.25 and $6 per million British thermal units (MMBtu), near the top of its range for 2009.

Meanwhile, certain hot gas plays, such as the Haynesville Shale in Louisiana and the Marcellus Shale in Appalachia, offer attractive economics even at current prices; master limited partnerships (MLP) with exposure to these regions, such as Regency Energy Partners LP (NSDQ: RGNC), are benefiting from still-solid drilling activity levels.

Results reported by MLPs and limited liability companies (LLC) are often misinterpreted because the appropriate metric for the group is distributable cash flow (DCF), not earnings–earnings is an accounting measure that includes a large number of non-cash charges such as depreciation. Because most MLPs are involved in asset-intensive businesses that tend to produce high depreciation charges, these accounting charges distort results. Most significantly, they don’t impact an MLP’s ability to pay distributions.

The fact that most financial news outlets continue to publish headlines reporting earnings figures can offer MLP investors an opportunity to buy our favorites at temporarily discounted prices.

Linn Energy offers an excellent example. After the company reported results on November 4, the headlines blared that Linn had missed estimates by $0.03 on weak production; the stock fell immediately as traders reacted in knee-jerk fashion to the headline. To make matters worse, some were undoubtedly scared off by the fact that Linn’s earnings per unit of $0.38 looked insufficient to cover its $0.63 quarterly distribution.

Some services even reported that Linn lost money in the quarter. This is true if you include the $156 million non-cash loss that Linn incurred on its large hedge book. Linn has oil and gas hedges covering all of its production through 2011 and further significant hedges beyond that. According to accounting rules, Linn must account for the fair value of these hedges each quarter; because oil and gas prices generally rose in the third quarter, these hedges lost money.

But Linn doesn’t actually have to pay out any cash due to changes in the value of its hedges, except for the hedges that actually expire in the course of the quarter; in this case, that amounted to only $14 million.

Moreover, the company is still effectively making money on a large portion of its hedge book because it took out hedges near the top of the oil and gas markets in 2008. Its average hedge prices are more than $92 per barrel for oil and around $8.90 per MMBtu for natural gas. Quarterly accounting charges for non-cash hedge losses are completely irrelevant when it comes to evaluating results.

Linn’s production results were also widely misconstrued. Linn has shut-in some of its production from higher cost natural gas plays and has a number of wells that it has drilled but not yet completed. These wells are ready to produce and can begin producing when natural gas prices recover.

Rather than focusing on gas production in a period of low prices, Linn has turned its attention to oil and integrating its recent acquisitions in the Permian Basin. While its gas hedge book shelters it from all price volatility surrounding its existing production over the next two years, it makes sense for Linn to focus on its oil plays at the current time as it can hedge any additional volumes it might produce at attractive prices.

Although this change in focus from crude oil to natural gas cost the company some gas production volumes, Linn actually hit the top end of its production guidance for the quarter.

On a distributable cash flow basis, Linn covered its quarterly distribution by a higher-than-expected 1.09 times. For the full year, Linn expects to cover its annual distributions by 1.13 times.

Linn’s conference call and the subsequent question-and-answer period with analysts generally focused on growth and acquisition opportunities. In particular, the company’s borrowing base was recently up for semi-annual review and was left unchanged at $1.64 billion.

Banks have been willing to maintain Linn’s borrowing base largely because the company’s hedge book shelters it from volatility in commodity prices. In addition, the company successfully completed an offering of new units, raising more than $180 million in early October.

All told, that leaves Linn with close to $600 million in cash and undrawn borrowing capacity. And management made no secret of the fact that it plans to deploy a good chunk of that cash toward acquisitions. Chief Operating Officer (COO) Mark Ellis said that he’s seen a significant up-tick in the number of oil-producing properties near Linn’s core areas of operation that are up for sale; he noted that Linn is active in these discussions.

Linn’s acquisitions have historically been immediately accretive to cash flows. And with the company already amply covering its current distributions, additional accretive acquisitions would allow Linn to consider boosting its distribution for the first time since the first quarter of 2008, a significant further upside catalyst for the stock. Linn Energy LLC is a buy under 25.

The Linn results also have a positive read-through for fellow Aggressive Portfolio holding Legacy Reserves. Legacy is more directly focused on crude oil than Linn and hedges a smaller percentage of its total production. It therefore benefited even more from the rally in crude oil prices during the third quarter.

Legacy’s main area of operation is the Permian Basin, the same region Linn recently entered via its $118 million acquisition and indicated it sees many opportunities to make acquisitions. With credit markets normalizing, Legacy will also have plenty of opportunities to make accretive acquisitions and look to expand its footprint in the region.

In fact, Legacy confirmed many of Linn’s comments in its own call. Legacy is a much smaller company than Linn and tends to target relatively small acquisitions. It has $177 million in cash and undrawn credit on its lending facility that it can deploy toward deals.

Management noted that it would like to move back to a position of targeting around $200 million in acquisitions annually, as it did before the 2008 credit crunch and commodity price collapse. The company noted that $70 oil was a watershed price for producers in the Permian; the per barrel price breached that level smaller producers became interested in monetizing their assets.

Also helping is an improvement in credit markets. Even though Legacy is a smaller company and therefore has more trouble accessing bond and syndicated loan markets, the firm stated that the difference between now and early 2009 was “night and day.” Management expressed confidence that if it did find an interesting single acquisition in the $200 million range, it could negotiate a financing deal with banks.

Legacy is a conservatively run exploration and production MLP with a coverage ratio in the quarter of 1.29 times, even if we include the impact of the additional units (shares) Legacy sold in September. Legacy Reserves LP rates a buy under 18.

Williams Partners LP (NYSE: WPZ) reported solid results for its gas gathering and processing business, beating analysts’ estimates and boosting its guidance for both 2009 and 2010 distributable cash flow by a wide margin.

In many cases, MLPs with exposure to G&P were harder hit by the decline in commodity prices in late 2008 and early 2009 than those involved in the actual production of natural gas and oil. Only conservatively managed MLPs–such as Williams Partners and Regency–with strong general partner sponsors–Williams Companies (NYSE: WMB) and General Electric (NYSE: GE), respectively–managed to escape last year’s commodity rout without distribution cuts. 

But the rebound in pricing is now a major tailwind, and the swing in Williams Partners’ results as a result of this upswing surprised many analysts.

The LP reported a 121 percent surge in DCF in the third quarter over the second quarter. DCF was still lower over the same quarter a year ago, that’s a tough comparison: The G&P business saw record profitability in the third quarter of 2008.

Williams Partners covered its quarterly payout by more than 1.8 times, among the highest ratios of any MLP in the MLP Profits coverage universe. Even more important, Williams Companies waived its right to incentive distributions in 2009 to help shore up Williams Partners’ cash position. Even if we exclude that benefit the LP managed to cover its payout by a still-healthy 1.5 times.

Two factors drove Williams Partners’ blowout results. First, the prices of natural gas liquids (NGL) such as ethane and propane improved markedly in the third quarter. NGLs are produced with natural gas, but historically prices have tended to track crude oil more closely. That relationship broke down somewhat in late 2008 and early this year, but Williams Partners noted that it’s seeing the relationship stabilize again.

This is critical to the profitability of the processing business because natural gas is the raw material for processors, while NGLs are the main product; when natural gas costs are low relative to prices for NGLs, processors realize higher margins.

The second driver was that drilling activity has remained relatively robust near Williams Partners’ main areas of operation. Volumes of natural gas and NGLs flowing through the LP’s lines haven’t dropped off as much as many forecast.

The company’s Four Corners gathering system collects gas from the San Juan Basin of New Mexico and Colorado. Weak gas prices would typically translate into few new wells and, therefore, falling well connections and lower volumes of gas to be gathered by the Four Corners system.

But Williams Partners pointed out in its conference call that 85 percent of the wells connected to this system are more than five years old. Production from gas wells falls most sharply in the first few years of production; the older wells connected to the Four Corners System would see minimal annual decline rates. That means that volumes in this system aren’t particularly sensitive to gas drilling or prices.

Wamsutter collects gas from Wyoming, an area where wells are younger and should be more sensitive to drilling activity. However, Williams noted that a number of big producers in the region such as BP Plc (NYSE: BP), Anadarko Petroleum Corp (NYSE: AP) and Devon Energy Corp (NYSE: DVN) have continued to invest during the downturn and now have access to Conservative Holding Kinder Morgan Energy Partners’ (NYSE: KMP) Rockies Express Pipeline to move its gas to markets in the East.

Prior to the building of this pipeline that gas would have been stranded in Wyoming. Also helping has been a narrowing of basis differentials–the different in gas prices between different trading hubs in the US. Gas prices in the Rockies have traditionally been at a steep discount to gas prices elsewhere and to the New York Mercantile Exchange (NYMEX) futures prices, but those discounts have narrowed sharply in recent months; prices for gas producers in the Rockies have improved markedly even as US gas prices generally have been weak.

Williams Partners’ Discovery system in the Gulf of Mexico benefited from increased production from new deepwater oilfields as well as the final repairs to damage caused by the 2008 hurricane season. Another point management noted is that gas volumes from the deepwater Gulf have typically contained an unusually large amount of NGLs and therefore require significantly more processing than gas produced onshore.

Management said that well connect activity has actually been accelerating at Wamsutter lately, suggesting that a further increase in volume is likely for the fourth quarter.

Management was also asked about the potential for growth and acquisitions and hinted that it may soon be in a position to begin new drop-downs from its general partner (GP) Williams Companies. Drop-downs are typically among the cheapest and easiest ways for an LP to grow, and Williams Companies has a large number of drop-down candidates suitable for sales to the LP. The LP hinted that its first drop-down candidate might be an expansion project connected to its Wamsutter system.

The rapid improvement in Williams Partners’ business likely means that it can resume distribution growth at some point in 2010. Williams Partners LP rates a buy under 28.

Navios Maritime Partners LP (NYSE: NMM) owns a fleet of dry-bulk ships. The LP purchased an additional ship during the third quarter, the Ultra-Handymax class Navios Apollon, acquired from GP sponsor Navios Maritime Holdings (NYSE: NM) for $32 million. Navios Partners didn’t have to take on additional debt to fund this acquisition because it raised about $37 million net of fees in a series of secondary unit offerings earlier this year.

One of the long-held theses in MLP Profits is that secondary unit offerings by MLPs can be a positive. Issuing new units obviously dilutes the value of existing units; however, most MLPs use the monies raised to buy new cash-generating assets. Ultimately, capital raised via debt and equity offerings spells rising distributions for existing holders and higher unit prices. This is why you’ll often see MLPs trade lower immediately after announcing a secondary offering, only to trade above their pre-offering price a few weeks later.

Navios Partners offers a classic example: Recent equity issuance facilitated the purchase of the Navios Apollon.

The LP spent considerable time during its third quarter conference call explaining the economics of the vessel purchase. The LP has had a long-term agreement in place with its GP to provide maintenance and operating expenses in exchange for a fixed daily fee that depends on the size of the ship in question. But that agreement was scheduled to expire this month, so Navios Partners signed a new, similar deal that provided for only small hikes to the fixed daily fees it must pay and extends the maintenance and operating contract through November of 2011.

For the ultra-Handymax class of ship, Navios LP pays $4,500 per day under the fixed-fee contract. But the Navios Apollon is chartered under a three-year fixed-rate contract at a rate of $23,700 per day. If we subtract the fixed operating fee from the fixed long-term charter fee, the total value of this deal is about $21 million over three years; in other words, the existing contract on this ship provides for about two-thirds of the purchase price.

Once the existing contract expires, Navios Partners will have to re-contract the Apollon. But the ship would only be about 12 years old at that time; it has more than a decade of remaining useful life. Although the current market wouldn’t support a $23,700 day-rate, it could support a rate closer to $18,000 to $19,000 per day. In light of the company’s fixed maintenance deal with Navios Holdings, that still gives the LP a nice profit margin.

Demand for dry-bulk ships looks robust longer term, driven by strong expected import demand for all sorts of commodities, including iron ore, coal and agricultural products, from developing nations. The main concern is one of supply.

A number of new-build ships are due out of shipyards over the next few years. However, a number of planned new-builds have been deferred because of credit and market conditions, and older ships are being scrapped at a record pace, helping to offset the impact of new-builds.  The overall picture: the dry bulk market is likely to continue offering decent returns for ship-owners, though it’s unlikely to see the record high day-rates of early 2008 anytime soon.

Navios Partners has no near-term exposure to spot dry-bulk rates. Its average ship has about 4.1 years left on long-term contracts signed at above-market rates, and its first two ships to come off contract will be at the beginning of 2011. These two ships only account for about 14 percent of revenues. The shipper has contracts covering some of its fleet capacity extending out as far as 2018.

 The company’s far younger than average fleet also tends to earn premium day-rates. Unless day-rates totally collapse from current levels, Navios Partners would still be able to earn decent cash flow for ships coming off contract. In the current quarter Navios Partners covered its new, higher quarterly distribution by nearly 1.6 times, a healthy margin by any measure.