The MLP Profits Portfolio Conservative Holdings are involved in fee-based business lines and have minimal commodity-price risk. They’re known for their consistent cash flows and steady performance.

All reported solid results for both the fourth quarter and full-year 2009. And most also noted potential for growth in 2010, either through new organic expansion projects or via acquisitions. Although most of our favorites have minimal commodity-price exposure, strong demand for natural gas liquids (NGL) and stabilization in crude oil demand are at least modest tailwinds for the year ahead.

Value investing legend Benjamin Graham once noted that in the short term the stock market acts like a voting machine, but in the long-term it’s a weighing machine. In other words, stock market performance in the short run doesn’t always immediately reflect underlying fundamentals but is driven by market sentiment, greed and fear.

Most of our favorites, despite reporting strong results, pulled back along with the broader market in late January through mid-February.

We’ve been warning of the potential for such a correction for some time and have purposely maintained our buy targets on some MLPs, even as they rallied above those levels. Our favorites performed extraordinarily well in the fourth quarter; periodic corrections and bouts of profit-taking are to be expected.

The key is that as long as fundamental prospects haven’t changed, these pullbacks are simply an opportunity to buy. Investors who bought the early February dip have been amply rewarded. Over the past two weeks most of our recommendations have rallied back to within a few percentage points of their January highs.

Our general advice remains to buy only the MLPs trading below our buy targets. We review these targets every week and raise them when it’s warranted by fundamentals. Pullbacks–and periodic corrections are simply part of investing–are great opportunities to add to your positions.

Here’s a review of earnings results and growth prospects for five of our Conservative Holdings. We reviewed results for Kinder Morgan Energy Partners LP (NYSE: KMP) in the January 22 issue.

Enterprise Product Partners LP (NYSE: EPD) reported record distributable cash flow (DCF) in its most recent quarter, demolishing expectations. Despite the fact that Enterprise boosted its payout for the 22nd consecutive quarter, the MLP’s distribution coverage was 1.5 times, one of the highest coverage ratios of any partnership in our coverage universe.

This coverage ratio is also considerably higher than Enterprise has traditionally targeted, suggesting there’s plenty of scope for the MLP to boost distributions further this year.

The main driver of strength in the business this quarter was its NGL Pipelines and Services business, one of Enterprise’s largest. Raw natural gas is primarily comprised of methane but usually contains a range of hydrocarbons known collectively as NGLs. Two of the most important NGLs are ethane and propane.

Ethane is used as a petrochemical feedstock to produce ethylene, the basic building block of most plastics and a host of other chemicals. Petrochemical manufacturers can use either ethane from natural gas or naphtha from crude to produce ethylene; the choice of feedstock depends largely on what’s more available and cost effective.

Source: Bloomberg

There are roughly 5.8 million British thermal units (MMBtu) in a barrel of crude oil. The chart above converts the price of oil into dollars per MMBtu so that it’s directly comparable to natural gas.

The chart shows the current price of oil is far higher than the price of natural gas on an equivalent energy basis. At the end of January, crude oil sold for $12.60 per MMBtu, while natural gas traded at $5.25–oil traded at 2.4 times the price of natural gas. This compares to a ratio of just 1.5 times at the end of January 2009.

When the price of oil is high relative to natural gas, the price of naphtha feedstock derived from crude is high relative to ethane feedstock from gas. Petrochemical manufacturers are likely to choose cheaper natural gas feedstock where possible. In fact, Enterprise noted that several ethylene producers were modifying their naphtha cracking units–equipment that converts naphtha into ethylene–so that they’re able to use more ethane instead.

This is great news for companies like Enterprise that are in the business of processing and fractionating natural gas; Enterprise removes NGLs from the natural gas stream and then separates the different NGLs.

Enterprise highlighted just how dramatically the NGL business has improved over the past year. In December of 2008 US ethylene production had fallen to an annualized run rate of 34 billion pounds, the lowest in 20 years, amid the economic meltdown. Ethylene producers were consuming just 700,000 barrels per day (bbl/d) of NGLs, and many of Enterprise’s processing operations were idle because there was no demand.

In contrast, in December of 2009 annualized ethylene production had rebounded to 51 billion pounds, and total NGL use to 1.3 million bbl/d. Enterprise’s fractionation facilities at Mont Belvieu and Hobbs were running at full capacity, and processing margins are high because inventories of NGLs in the US are low.

Enterprise also noted that nearly a quarter of the ethylene produced in the US last year was destined for the export market. A strong rebound in global demand for plastics coupled with low North American natural gas prices gave US producers a significant advantage selling into the global market. Enterprise’s own terminal for exporting liquefied petroleum gas (LPG)–primarily propane–is fully utilized, exporting around 3 million barrels per month overseas.

Although some of this improvement is cyclical and traceable to the global economic rebound, there are longer-term secular forces at work, too. Specifically, the discovery and rapid development of domestic unconventional gas resources has changed the supply picture in the US; gas supplies are plentiful and can be produced at a reasonable cost.

Natural gas prices are unlikely to stay at current depressed levels forever, but America’s abundance of gas should keep prices lower than in many other regions of the world. And because the supply picture for crude is tighter, the crude-to-gas price ratio should remain elevated, favoring ethane and propane as petrochemical feedstock. All told, this is a nice tailwind for Enterprise’s NGL business.

The NGL business was strong, and it isn’t the only area where Enterprise sees more opportunity. Enterprise also noted that it’s finding more synergies resulting from last year’s acquisition of TEPPCO Partners LP; management revised higher its annual synergies from $20 million per year to $35 million.

Enterprise is also benefiting from the red-hot Eagle Ford Shale play in South Texas. The Eagle Ford is shaping up to be among the most prolific in the US. Fortunately for Enterprise, it’s also located close to many of the MLP’s processing and pipeline assets, putting it in a good position to benefit from increased production volume from the play.

In fact, Enterprise has already spent $60 million on projects to bring 300 million cubic feet of Eagle Ford gas into its system. Enterprise is now building a 24-inch pipe that will serve the fast-growing field.

Enterprise is undoubtedly among the best diversified, best managed, most consistent performers in the MLP space. Buy Enterprise Products Partners LP under 33.

Genesis Energy LP (NYSE: GEL) also reported solid results for the fourth quarter, generating DCF of $23.7 million. That’s enough to cover the partnership’s distribution 1.43 times, a high coverage rate for an MLP.

There were a lot of moving parts for Genesis in the quarter. On the positive front, the MLP is seeing an increase in volumes on its crude oil pipelines system and in its carbon dioxide (CO₂) pipelines business. This was partly due to the restart of production at the Little Escambia Creek field that was shut in because of weak crude oil prices and maintenance work in November of 2008; the field was restarted in December and is now ramping up. Genesis has no commodity-price exposure in this business, but higher volumes of crude and CO₂–used to boost recovery from older fields–mean higher revenues.

Genesis’ refinery services segment processes sour gas–natural gas with a high sulfur content–to remove sulfur. The MLP produces and sells sodium hydrosulfide, a chemical that is used by the mining industry, primarily to separate copper from molybdenum. This business was down in 2009 but appears to be picking up steam in 2010 amid improving demand from mining companies.

The supply and logistics division primarily blends and stores crude oil. One of the drivers of profitability in this business is contango in the oil futures market, a situation where spot and near-month crude oil prices trade at a much lower price than longer-dated futures. In this scenario, companies that store crude are able to purchase spot crude at discounted prices and then sell it forward to earn a locked-in profit. Near-record contango a year ago made this an extremely profitable business, but with contango lower Genesis isn’t making as much money from its supply and logistics division.

Genesis has a far higher than average coverage ratio, relatively low debt and a well-diversified business that survived the stress test of 2008-09 in good shape. Higher crude oil prices should support volumes in its pipeline business, while improvement in refined product demand and mining profitability should support its supply and logistics and refinery services business. Buy Genesis Energy Partners LP under 21.

Refined product pipeline and terminal operator Magellan Midstream Partners LP (NYSE: MMP) reported DCF of $104.9 million, a new quarterly record. That took full-year DCF to $328.4 million, considerably higher than management’s November 2009 guidance of $310 million. DCF coverage was 1.1 times, a bit lower coverage than Enterprise and Genesis but not a concern because Magellan’s business is among the steadiest you’ll encounter.

Magellan maintained but didn’t increase its distribution in 2009, partly due to the fact that the MLP purchased its general partner (GP) last year. We explained the relationship between an MLP and a GP in the Nov. 20, 2009, issue. Funding this deal represented an immediate outlay of cash; however, MLPs normally pay their GP an incentive distribution rights (IDR) fee every quarter. Because it purchased its GP Magellan no longer has to pay IDRs. This leaves ore cash available for distributions.

In addition, over the summer Magellan purchased the Longhorn refined products pipeline out of bankruptcy. While Magellan got the asset on the cheap, the pipe wasn’t being fully utilized when management made the purchase, so it wasn’t immediately accretive to cash flow.

Nonetheless, many investors wondered if Magellan would be boosting its distribution in 2010. Management indicated that that was likely and during the conference call, guided for their fourth-quarter 2010 distribution to be an impressive 6.5 percent higher than their fourth-quarter 2009 payout.

Magellan’s base business remains healthy. The volumes of gasoline Magellan transported over its network in 2009 actually rose 11 percent over 2008 totals, though distillate volumes–diesel and heating oil–fell 13 percent. Demand for distillates is more sensitive to the economy. Due to some planned growth projects and the ramp-up of its Longhorn acquisition, Magellan is looking for 4 percent total growth in volumes for 2010.

Of course, any decline in volumes due to the weak economy was more than offset by a 7.6 percent automatic tariff rate increase that went into effect in July. This is one major reason why the refined product pipeline business is such an attractive and stable one; tariff-rate increases are based on inflation and offer an additional layer of protection against rising costs.

Magellan’s terminal business also performed well. One area where the company has been making a lot of additional cash is in ethanol blending–mixing ethanol with gasoline to meet fuel-blend requirements. The government is mandating an increase in ethanol use over the next few years, so this business should continue to grow as Magellan processes and blends higher volumes of ethanol.

A rock-solid base of distributable cash flow, greater clarity on distribution growth and the elimination of a need to pay IDRs make Magellan Midstream Partners LP a good safety-first buy on dips under 45.

Spectra Energy Partners LP (NYSE: SEP) reported fourth-quarter DCF of $27.3 million and $158.1 million for the full year. That’s enough to cover distributions by a comfortable 1.3 times of a full-year basis.

Spectra also offered guidance for 2010 DCF of $175 million, an increase of 11 percent over 2009. This is due primarily to a full year of cash flows from its acquisition of the Ozark gas transmission pipeline and the expansion of its Egan 3 gas storage facility, which was completed and put into service in the third quarter.

The company’s distribution guidance doesn’t assume any new acquisitions, so there could well be more upside to DCF if Spectra acquires any additional assets. Even without new purchases, the MLP looks on pace to increase its payout by around 11 percent this year.

Looking a bit further into the future, Spectra has a long list of organic expansion projects either underway or in the planning stage. The list includes the Moss Bluff Storage facility in Texas, to be completed by the second half of 2011, an additional storage facility at its Egan operations in Louisiana, and an expansion of its Gulfstream pipeline that stretches from Pascagoula Mississippi and Mobile Alabama across the Gulf of Mexico and into Florida.

Spectra owns fee-based assets with no real exposure to commodity prices and supported by long-term contracts. But the MLP has considerable distribution growth potential given its extensive slate of organic expansion projects. Buy Spectra Energy Partners LP under 27.

Sunoco Logistics Partners LP (NYSE: SXL) owns refined products pipelines, terminals and storage facilities. The crude oil storage business is less profitable now than it was a year ago.

When the crude oil market is in steep contango and crude prices are volatile, companies like Sunoco Logistics can take advantage by storing oil and selling it forward using the futures market. This essentially allows the MLP to lock in a risk-free profit. With contango much less steep now than it was a year ago, these operations are less profitable.

That said, Sunoco benefited from the same 7.6 percent tariff increase that went into effect last July, helping to offset the decline in refined products volumes because of the recession. And the company is targeting a minimum distribution boost for 2010 of 10 percent; management hinted that there could be considerable more upside than that.

Two more points are worth noting. First, Sunoco Logistics renegotiated its IDR structure with its general partner; the MLP paid some cash out immediately in exchange for a lower IDR rate. The MLP changed its IDR structure so that the higher IDR splits with its GP won’t go into effect for some time. Although complex, this deal has the effect of lowering Sunoco Logistics’ cost of capital.

Second, Sunoco noted that it’s hearing that several major integrated oil companies are planning to sell refined products-related pipelines and storage facilities. This is consistent with what big integrated oil companies said about their refining operations in the most recent quarter. Most are looking for ways to boost profitability in the business.

Sunoco is in a good position to buy these assets at prices that will result in immediate boosts to DCF and distribution potential. Buy Sunoco Logistics Partners LP on any dips under 65.