Master limited partnerships (MLP), as measured by the Alerian MLP Index, were barely in the black for 2012. And what gains they did make were basically thanks to paying robust distributions, as unit prices were actually mostly underwater.

The biggest negative for the sector has been the threat of sudden austerity in the US. Even midstream energy MLPs would likely see less business development activity should the world suddenly dip into recession. That would most likely take the form of cancelled or rolled back projects rather than reduced current revenue. But the result would still be slower cash flow and distribution growth.

Meanwhile, energy producer MLPs and other companies affected by margins–i.e., commodity prices and the differences in their selling prices–could see a direct hit to sales that aren’t hedged. That’s because energy prices would also be a victim of slower growth. In fact, we’ve seen some weakness already here too that will have an impact on fourth-quarter results for some.

As their performance in 2008 proved, even a severe economic shock in 2013 would not derail MLPs that have continued to practice conservative financial and operating strategies. If anything most managements were even more risk-averse than usual in 2012, as worries about economic growth and energy prices have grown.

That means once the markets do get a handle on the damage sudden austerity in 2013 will do, we can look forward to a recovery. And in the meantime I’m confident our MLPs will continue to make secure distributions and even generate payout growth.

Another negative driving down MLP prices recently has been tax selling. Not only have many of our recommendations surged the past four years.

But they’ve paid a large chunk of distributions as return of capital. That means many investors are sitting on some pretty massive paper gains that will be more expensive to take after Dec. 31, due to a likely higher tax rate on capital gains.

Rumor of possible legislation to tax MLPs as part of a budget compromise have been a consistent concern this year. It’s also almost certainly generated some selling.

Ironically, the only active bill in the US Congress concerning MLPs now is an attempt to expand their definition to renewable energy projects.

A new tax on MLPs would almost certainly trigger deeper selling sector-wide. And the possibility of such legislation at a time of craziness in the nation’s capital is one reason why no investor should ever over-balance their portfolio toward MLPs, any more than they should any other sector.

But with a total market capitalization less than that of Exxon Mobil Corp (NYSE: XOM), US MLPs are still a tiny sliver of the investment universe. In fact, taxing them as corporations would net the US Treasury something in the neighborhood of around USD300 million, enough to fund a trillion dollar annual deficit for just a few hours.

That’s a sharp contrast with the percentage of the market and total tax potential of Canadian income trusts on the eve of when their tax was announced on Halloween night 2006. And it means new legislation to tax MLPs is still quite unlikely.

Unfortunately, that doesn’t mean the selling of the past couple months won’t continue into 2013. But coupled with the fact that MLPs are still playing it conservative operationally, it means we will see recovery when the macro fears cool, so long as the underlying businesses of our MLPs remain sound.

My approach therefore is to stick with what we have. We have vetted all of these MLP recommendations repeatedly. Some, notably the Aggressive Holdings, are more exposed to commodity-price swings than others.

But, by and large, all are on track with business plans and therefore their ability to raise distributions over time. That’s the fuel that’s produced the big gains we’ve enjoyed since the first issue of this advisory in spring 2009. And it’s what will keep our holdings on top for years to come.

Thanks for reading.

In This Issue

Major trends for the New Year will look a little like those that drove MLP performance in 2012. Our favorites continue to build businesses capable of surviving–and thriving–for the long term. See Portfolio Update: Four to Watch for in 2013.

The simplest advice for equity market success is “buy low, sell high.” Here are two solid MLPs selling for bargain-basement prices. It’s time to act. See Best Buys: Buy Low.

One of the benefits of an MLP Profits subscription is the ability to participate in Roger Conrad’s monthly readers-only chats. The complete transcript of the most recent chat is posted on the MLP Profits website. Here are expanded answers to several queries as well as my responses to other questions received throughout the month. See In Focus: Answers to Your MLP Questions.

Oil and gas exploration and production is a volatile business. Focusing on MLPs with active hedging programs that stabilize cash flow and ensure distributions qualifies as an educated gamble. See Sector Spotlight: If You Venture in the Upstream.