A reader recently questioned this newsletter’s relatively busy slate of portfolio additions since the springtime change in personnel. He worried that research into the new picks had been carried out to “the detriment of a thorough and complete and reflective analysis and an ongoing critical eye on performance.”

The examples he used were Linn Energy (NYSE: LINE) and Boardwalk Partners (NYSE: BWP), two of the bigger drags on this year’s portfolio performance.

The fact that one was a longtime portfolio mainstay that had made many subscribers much money over the years, and the other the last pick of the prior editorial team, won’t much console subscribers who recently lost money on those investments. Neither will the fact that we discussed some of the red flags raised by both names in downgrading them to a Hold well before urging a sale.

I imagine it also won’t make the sting go away for me to point out that no analyst can ever anticipate all unfavorable market moves, including those based on fear, misinformation or surprise disclosures by a partnership. Losing money, sometimes even on relatively high-yielding MLPs, is an inherent hazard and a fact of life in investing. No analyst can shield any investor from all such disappointments.

But we can certainly minimize the toll by picking partnerships that offer more reward than risk and stand a good chance of delivering on their promises. By and large we’ve done that this year, as the following table shows:

The average return of 9.3 percent compares favorably with the 3.3 percent total return of the Alerian MLP Index since June 7. And it hasn’t all been courtesy of Icahn, either: the median return was SXL’s 8.3 percent.

Yet our research into Energy Transfer Equity didn’t stop us from dropping Eagle Rock Energy Partners (Nasdaq: EROC) from the portfolio on May 29; it’s since lost 35 percent. Nor did it stop us from sticking with Navios Maritime Partners (NYSE: NMM) in the spring while others harped on the threat of a cut in the distribution. We upgraded  NMM to a Buy on Sept. 9 and it’s rewarded us with a 16 percent rally in the three months since.

Which is to say that this portfolio will always keep evolving to present the most attractive investment options from the entire MLP space.

This is an asset class that’s massively outperformed most alternatives over the last decade and is now priced accordingly even as rising interest rates threaten this cornucopia. To sit still in an environment like that would not be wise. The energy industry is evolving faster than ever, and those slow to react – be they companies or investors – risk getting left behind.

We aim to anticipate, and participate in, the growth opportunities, while looking out for the macro-economic and  business risks confronting the MLPs we recommend. At this fairly late stage of the interest-rate cycle, that means focusing on the strongest growth stories and on the MLP sponsors that control their own fate, at the expense of steady yielders whose upside will accrue mostly to their general partners.

The new buy recommendations presented below and the deletion specified in Portfolio Update are two complementary parts of this strategy. They let us head into 2014 with a stronger portfolio than the one we took over in May. And we’ll keep testing and improving it next year. Doing as little as possible is often a winning investing strategy. But doing nothing is almost never the right choice.

Crosstex, Back From the Brink

To understand what can happen to an unprepared MLP in a sudden downturn, look no further than Crosstex Energy (Nasdaq: XTXI), the general partner of Crosstex Energy LP (Nasdaq: XTEX), the Dallas-based MLP engaged in natural gas gathering and processing.

In early 2009, after an ill-timed expansion that didn’t foresee a global recession and the ensuing collapse in gathering revenue, XTXI shares fetched less than $1, down from $30 just six months earlier as the dividend disappeared. The company and its affiliated partnership struggled through a few lean quarters, culminating in asset sales to pay down debt. But Crosstex kept the right assets, including gathering systems and processing plants in the Barnett Shale near Dallas as well as along the Louisiana coast, and has since benefited from a robust recovery in the region’s energy production and pricing.

The XTXI dividend boosted by incentive distribution rights from XTEX has expanded to yield 2.5 percent or so, even as the share price recovered to more than $20 by the summer. And then, on Oct. 21, came news that pumped up XTXI’s price more than 70 percent that trading session: Crosstex will merging its operations with the midstream assets of a much larger partner, the extremely well-heeled Devon Energy (NYSE: DVN).

In recent years, Devon has transformed itself from a global gas explorer into an exclusively domestic driller increasingly focused on boosting the production of crude and other liquids from the booming unconventional shale plays in its back yard. It had already been planning to monetize its considerable midstream assets via an initial public offering of a sponsored MLP. Instead, it has decided to merge its midstream arm with Crosstex’s highly complementary assets, creating a new venture with added scale, the financial flexibility to grow rapidly and the increased stability that Devon’s committed production will provide.

Source: Devon presentation

While production in Crosstex’s Barnett Shale heartland is waning, the partnership’s plants there remain fully engaged, and will benefit from Devon’s continuing large-scale investments in the basin. In the longer run, Crosstex is now well-placed to follow Devon into the Permian and the Eagle Ford, more promising shale oil plays where it already has a presence and where Devon is ramping up crude production.

The combined midstream venture will also have a heavy and strategic presence in coastal Louisiana, the future home of many new petrochemical plants now on the drawing board to take advantage of the cheap incoming shale gas and natural gas liquids (NGLs). Crosstex also owns a crude pipeline in the Utica that it hopes to use as a backbone for gathering assets in that fast-developing and extremely promising basin.

Sometime in the first quarter of 2014, if the deal closes as scheduled, XTXI shareholders will be able to exchange each share they own for a share in a new general partner that will manage a new MLP uniting Devon’s and Crosstex’s US midstream assets. XTXI shareholders will get also get a $2-per-share cash payment, and the new company’s incentive distribution rights will entitle it to half of all incremental distribution growth at the new MLP, instead of the 25 percent IDR split XTXI has harvested this year.

Devon, which will retain majority ownership of the new midstream MLP as well as its general partner, has pegged the GP’s dividend next year at 80 cents a share, which would represent an increase of more than 50 percent from current levels. Thereafter, its promised annual dividend growth above 20 percent. Subtracting the promised $2-per-share cash payment from XTXI’s current share price puts the prospective 2014 yield at 2.6 percent, par for the course for a fast-growing distribution from a general partner.

The merged entity will have relatively low debt, Devon’s considerable upstream investments to piggyback on, and plenty of growth opportunities in Texas, on the Gulf Coast and in the Ohio River Valley. Incentive distribution rights from the new MLP will add up fast. We’re adding XTXI to our Aggressive Portfolio; buy below $37.

Western Refining’s New Catalyst

Like Devon, Western Refining (NYSE: WNR) is another tax-paying corporation that has decided to acquire an existing MLP instead of starting one from scratch to shelter some of its assets. Western Refining operates refineries in El Paso, Texas, and Gallup, New Mexico, with a combined throughput capacity of 153,000 barrels per day. The refineries run largely on sweet crude and are well-placed to buy it at a discount from producers in the Delaware basin of west Texas, which is part of the Permian basin.

On Nov.  12, Western Refining announced an agreement to pay $775 million to the private-equity sponsors of Northern Tier Energy (NYSE: NTI) for the general partner interest in that MLP, along with the 38.7 percent of its limited partner units not held by the public. The deal will give Western Refining control of Northern Tier’s 89,500 bpd refinery in St. Paul Park, Minnesota, along with related pipeline and distribution assets as well as a chain of retail filling stations.

Curiously, Northern Tier backers TPG Capital Management and ACON Investments sold out at a 6 percent discount to the price of their LP units on the eve of the announcement, with control of the GP thrown for good measure. This caused WNR’s share price to spike 9 percent on the news.

It has continued to rally since, to a record high above $40 a share Monday before pulling back a bit. Yet WNR still trades at a 3.3 multiple of its Enterprise Value to EBITDA, well below NTI as well as industry leaders Marathon Petroleum (NYSE: MPC) and Valero (NYSE: VLO). One way to shrink the gap would be to drop down WNR’s own refineries into Northern Tier’s variable distribution MLP, where they would likely fetch a more generous valuation based on their distributions.

Western Refining appears to have bought low on a lucrative refinery benefitting from discounted Bakken and Canadian crudes, and yet its own refineries are valued even lower according to a UBS analyst who expects the merger of WNR’s refinery assets with NTI’s inside an MLP.

Even if this move doesn’t happen, Western Refining will have diversified on the cheap and will remain Northern Tier’s general partner. Though both entities reported disappointing third-quarter earnings, the current market environment is looking healthier now that the discounts on domestic crude have widened and gas prices firmed. As an added bonus, short interest in WNR stood at a massive 33 percent of float as of Nov. 15. The short-covering in this name has likely just begun.  We’re adding WNR to the Aggressive Portfolio; buy below $46.