Every bull market eventually comes to an end. The catalysts pushing profits, dividends and share prices higher ultimately dissipate. Equity valuations become so high that the expectations built into them become almost impossible to achieve.

Finally, the air goes out of the balloon. Growth slows to a crawl or shifts into reverse. Share prices start to come down slowly at first. Then, the selloff accelerates as investors lose heart and bail out. Expectations eventually go so low that it’s nearly impossible for companies not to beat them. At this point, the cycle begins anew on the upside.

The current bull market for master limited partnerships (MLP) eventually will end. Investors’ expectations will ratchet up to levels where almost any news is a disappointment. The massive deficit in energy infrastructure will become a surplus as MLPs overbuild to meet anticipated demand, rather than inking contracts with customers beforehand.

Prospective returns on new projects will fall as capacity becomes cheap, even as capital costs rise and squeeze profits. Distribution growth will slow to a crawl, and some MLPs will slash their payouts. Finally, share prices will head lower. The bull will at last be broken.

Today, however, is not that day. New MLP debt and equity offerings have become slightly scarcer in recent months because of the prevailing uncertainty and volatility in stock and credit markets. But the bull market for MLPs remains intact: Valuations remain reasonable, capital is readily available at historically low rates, and low-risk expansion opportunities abound to support rapidly growing production from US unconventional oil and gas plays.

Conservative Portfolio Holding Enterprise Products Partners LP’s (NYSE: EPD) 57-year debt still trades at a yield to maturity of just 6.24 percent. The MLP’s five-year debt also has a yield to maturity of only 2.28 percent, though its credit rating of BBB- is barely investment grade. Linn Energy LLC’s (NSDQ: LINE) B credit rating places the oil and gas producer firmly in the junk category. But Linn Energy’s 10-year debt sports a yield to maturity of only 6.73 percent.

As for equity valuations, the Alerian MLP Index has been on a tear since Oct. 4, 2011, when it briefly touched a low of 316.35. The benchmark index has rallied almost 20 percent in subsequent weeks, clawing its way back to its early July high. This resurgence should encourage MLPs to finance growth by issuing new units, even as the window to issue debt is wide open.

In the Here’s the Deal: MLPs, Elliott highlighted MLPs’ acquisitions of major pipeline companies–deals that would have been out of the question just a few years ago. A number of prime takeover targets are still unspoken for, including Williams Companies (NYSE: WMB), which only a few weeks ago was bidding against Energy Transfer Equity LP (NYSE: ETE) for the right to buy Southern Union (NYSE: SUG) and its portfolio of midstream gas infrastructure.

Southern Union has set Dec. 9, 2011, as the meeting date for shareholders to vote on the proposed takeover. The deal got a further boost this month from yet another transaction: AmeriGas Partners LP’s (NYSE: APU) $2.9 billion purchase of Growth Portfolio holding Energy Transfer Partners LP’s (NYSE: ETP) propane operations. The drop down of a $2 billion, 50 percent interest in a giant Florida pipeline from Energy Transfer Equity to Energy Transfer Partners is a critical piece of the general partner’s financing to buy Southern Union.

There had been questions about Energy Transfer Partners’ ability to finance drop-down transactions of Southern Union’s assets from Energy Transfer Equity because of the MLP’s sizable investments in natural gas liquids (NGL)-related infrastructure with Aggressive Portfolio holding Regency Energy Partners LP (NYSE: RGP).

The sale of Energy Transfer Partners’ propane business solves this problem by providing $1.5 billion in cash and a 34 percent equity stake in AmeriGas Partners. The deal also makes sense for AmeriGas Partners. Not only will the new assets increase the scale and reach of AmeriGas Partners’ propane-related infrastructure by about 60 percent, but the MLP also gains a financially sound limited partner in Energy Transfer Partners.

We expect more MLPs to step up to the plate and buy whole companies in coming months. Meanwhile, there’s no shortage of smaller deals in the works. The pace of new projects also shows no sign of slacking. Enterprise Products Partners, for example, this month announced plans to further expand its NGL assets. Energy Transfer Partners also inked a long-term, fee-based agreement to build a 117-mile gas gathering pipeline and to provide related services for ExxonMobil Corp (NYSE: XOM) unit XTO Energy. The MLP will also build a major processing plant.

XTO Energy is seeking to improve its access to midstream infrastructure to process and transport the natural gas and NGLs produced from its extensive reserves in the Haynesville Shale and other unconventional plays. Energy companies throughout North America face similar needs; the rapid development of shale oil and gas plays requires an extensive build-out of supporting infrastructure.

Our favorite MLPs are well-positioned to take advantage of this secular growth trend. All this construction adds up to higher distributions and, ultimately, higher unit prices.

How We Rate How They Rate

Operating results and distribution growth provide compelling evidence that MLPs continue to thrive. “By the Numbers” shows how each Portfolio members stack up according to our four-point ratings system.

Source: Bloomberg, MLP Profits

Here’s a quick review of our ratings criteria.

1. Payout ratio based on distributable cash flow (DCF). DCF is the best measure of an MLP’s profitability, as it effectively takes into account their ability to avoid paying corporate income taxes. In contrast, earnings per share do not capture an MLP’s profitability. An MLP earns a ratings point on this criterion depending on the extent to which its DCF covers its distribution and is exposed to commodity prices.

Conservative Portfolio holding Kinder Morgan Energy Partners LP (NYSE: KMP), for example, earns a safety point for a 1.03-to-1 coverage ratio because its DCF hinges primarily on fee-based income. On the other hand, Aggressive Portfolio holding Penn Virginia Resource Partners LP’s (NYSE: PVR) 1.02-to-1 distribution coverage ratio doesn’t warrant a safety point because the firm’s coal mining royalties depend on commodity prices. A 1-to-1 coverage ratio is equivalent to a 100 percent payout ratio.

2. Percentage of DCF that’s fee-based. We’re bullish on prices for oil and NGLs and somewhat less so for natural gas. But the less a company relies on sales of these commodities, the less volatile its revenue will be over the long haul. As a result, we reward companies with fee-based income of 75 percent or higher with a safety rating point.

Enterprise Products Partners’ ability to boost distributions every quarter throughout the 2008-09 financial crisis is a testament to the power of its fee-based energy infrastructure model. Note that Aggressive Portfolio holding Linn Energy and other oil and gas producers that lock in revenue by hedging future production still don’t earn a safety point. Linn Energy’s current safety rating of 3 probably overstates any near-term risk. The longer-term risk occurs when hedges roll off. And even companies that have hedged their production fully run the risk if spot prices outstrip their hedged prices and output comes up short.

3. Debt due through Dec. 31, 2012. If we’re going to have a reprise of the 2012 credit crunch–an increasingly unlikely event–the companies that stand to suffer the most are those with substantial near-term refinancing needs. Absolute levels of debt can be dealt with if maturities are long enough. We prefer MLPs with no debt maturities–bonds, loans or credit agreements–between now and the end of 2012. That’s plenty of time for another credit freeze to thaw. Any MLP whose debt maturities are less than 5 percent of its market capitalization will also get a point on this score. We’ll adjust this time frame forward in coming months.

4. At least one distribution increase in the last 12 months. There’s no better guarantee that a distribution is safe than a recent increase to an MLP’s payout. There’s also no better indication that a particular MLP is growing its business. Fourteen of the 17 MLPs in our model Portfolios have boosted their distribution at least once in the past 12 months. The three holdouts were involved in transactions that should lead to future distribution growth.

Aggressive Portfolio holding Encore Energy Partners LP (NYSE: ENP), for example, is in the process of being taken over by Vanguard Natural Resources LLC (NYSE: VNR), which has increased its distribution by 5 percent over the past year. Meanwhile, Energy Transfer Partners probably won’t increase its payout until its general partner closes the Southern Union acquisition and drops down the $2 billion Florida pipeline interest. Finally, Growth Portfolio holding Inergy LP (NSDQ: NRGY) is still in the process of spinning off part of its midstream energy assets to cut debt.

These three MLPs are likely to grow their distributions once these transactions are completed. In the meantime, the rest of our picks are in the pink of health, adding new assets, reliably growing distributions, and limiting financial and operating risks. That’s a sure-fired formula for success, even in this uncertain market.

Another Round of Numbers

Five Portfolio holdings–Kinder Morgan Energy Partners LP, Sunoco Logistics Partners LP, Linn Energy LLC, Navios Maritime Partners LP and Penn Virginia Resource Partners LP–have reported their third-quarter earnings. Reporting dates for the rest are listed in the table, By the Numbers.

Conservative Bent

Kinder Morgan Energy Partners LP (NYSE: KMP)

Kinder Morgan Energy Partners is usually the first of our Portfolio holdings to announce quarterly results. This time around, much of the focus was on Kinder Morgan Inc.’s (NYSE: KMI)–Kinder Morgan Energy Partners’ general partner–takeover of El Paso Corp (NYSE: EP), a deal Elliott discussed at length in Here’s the Deal: MLPs.

This acquisition sets the stage for a number of drop-down transactions; management now projects that Kinder Morgan Energy Partners’ will grow its distribution at an average annual rate of 7 percent over the next few years.

Kinder Morgan Energy Partners’ Nov. 14, 2011, disbursement will be $1.11 per unit–a 5 percent increase from year-ago levels. That’s the seventh consecutive time the MLP has boosted its quarterly payout since early 2010. The increased distribution reflects continued asset growth, as well as the firm’s commitment to pay out essentially all of its cash flow after maintenance capital expenditures.

During a recent conference call to discuss third-quarter results, Chairman and CEO Richard Kinder noted that all five of the MLP’s business segments produced solid results over the past year, leading to an 18 percent year-over-year increase in overall earnings. DCF–the account from which distributions are paid–rose 24 percent before one-time items that included a noncash writedown of certain asset carrying costs and a reserve adjustment related to a court ruling. Nine months into 2011, Kinder Morgan Energy Partners has generated 11 percent more DCF than in the first three quarters of 2010.

Higher volumes at pipelines and terminals were a big plus, though somewhat offset by lower gasoline and jet fuel volumes. NGL volumes were up 14 percent from a year ago, while ethanol volumes climbed by 6 percent. Earnings from natural gas pipelines surged 31 percent in the quarter, boosted by the May 2011 acquisition of pipelines, gas processing and treatment facilities in the Haynesville Shale from Petrohawk Energy Corp and the startup of the Fayetteville Express Pipeline.

Even the long lagging carbon dioxide (CO2) transport business turned in a solid showing, with earnings up 25 percent. Energy producers inject CO2 into mature fields to boost output. The company hedges commodity price exposure out of that business.

Units of Kinder Morgan Energy Partners had lagged in late summer because of unfounded fears about the MLP’s ability to grow its distribution. Since then, the unit price has exploded out to an all-time high, reflecting the potential for drop-down transactions from Kinder Morgan Inc. We will revisit our buy price on Kinder Morgan Energy Partners once its general partner’s acquisition of El Paso Corp closes. Until then, Kinder Morgan Energy Partners LP continues to rate a buy under 75.

Sunoco Logistics Partners LP (NYSE: SXL)

Conservative Portfolio holding Sunoco Logistics Partners LP reported that its DCF surged to a record $109 million in the third quarter, up 55.7 percent from last year’s tally. Management also announced a 3-for-1 unit split and a distribution growth target of 7 percent for 2012–a slight improvement from the 6 percent growth rate of the past 12 months. The split will take place on Dec. 2, 2011, to unitholders of record as of Nov. 18.

The $1.24 per unit distribution payable on Nov. 14, 2011, marks the 26th consecutive time that the MLP has boosted its quarterly dividend. Sunoco Logistics Partners also generated enough DCF to cover its third-quarter payout by a 2-to-1 margin. This coverage ratio, coupled with the firm’s focus on fee-generating business lines, provides ample protection against volatile commodity prices or economic weakness. The MLP has also made $494 million worth of acquisitions through the end of the third quarter, providing plenty of additional upside.

The MLP’s assets include crude and refined-products pipelines and terminals. Expansion of butane blending services was a major catalyst for operating income growth at the firm’s terminal facilities. Acquisitions of additional joint-venture interests in pipelines were also a major plus.

Part of the reason Sunoco Logistics takes such a conservative approach to its distribution is that the firm also makes money by leveraging its assets with “market-related opportunities.” Income from that resource can be volatile. But management historically has left plenty of cash in reserve to cover its obligations and invest in growth projects.

The MLP’s discipline makes it one of the most conservative names in our coverage universe. The recent flight to safety has sent units of Sunoco Energy Partners soaring. Investors should buy Sunoco Energy Partners LP on any dips below 90.

Greater Risk, Greater Reward

The holdings in our Aggressive Portfolio have more exposure to commodity prices and the direction of the US economy. However, recent volatility in commodity prices and concerns about economic growth didn’t prevent three of our picks from reporting solid third-quarter results.

Linn Energy LLC (NSDQ: LINE)

Units of Linn Energy LLC have recovered virtually all the ground they lost during the sstock market’s summer and early fall swoon. The oil and gas producer has hedged all of its oil output through 2013 and all of its natural-gas production through 2015.

The firm has boosted its average daily hydrocarbon output by more than 30 percent over the past 12 months, leading to a 30 percent surge in third-quarter cash flow. These solid operating results enabled Linn Energy to cover its quarterly distribution by a margin of 1.1 to 1. Management expects to cover its full-year distribution 1.18 times.

Management also continued to opportunistically lock in favorable pricing with new hedges. The firm also repurchased 530,000 units at an average price of just $32.76, some 15 percent below the current price.

CEO Mark Ellis projects that Linn Energy’s capital investments will continue to deliver quarter-over-quarter production growth of at least 6 percent. The vast majority of this increased output will be liquid hydrocarbons from proven reserves in the Granite Wash region, where the company has 29 operated horizontal wells and working interest in 25 non-operated wells. Nine additional wells are slated to come onstream soon.

Linn Energy’s Granite Wash output rose 25.5 percent sequentially in the third quarter. Pending acquisitions in the Wolfberry portion of the Permian Basin will expand the company’s portfolio of drilling opportunities.

Growing output sometimes entails higher costs and the need to expand the hedge book, but management continues to demonstrate its ability to handle these challenges

Few energy producers are lower-risk plays than Linn Energy LLC; the stock rates a buy up to 40.

Navios Maritime Partners LP (NYSE: NMM)

Navios Maritime Partners LP has lagged our other Portfolio holdings, largely because economic weakness and overbuilding has depressed rate in the dry-bulk shipping business. That the company is headquartered in Greece has also weighed on investor sentiment.

Ironically, neither the weak shipping market nor the travails of the Greek government pose a legitimate threat to Navios Maritime Partners’ cash flow or distribution. The company’s closest debt maturity isn’t until November 2017, when two loans and a credit agreement will reach the end of their term. The firm also books its vessels under long-term contracts that lock in cash flows and protect against fluctuations in day-rates.

Navios Maritime Partners’ third-quarter results underscore this strength. Revenue surged 26 percent from a year ago, fueling a 24.1 percent jump in the MLP’s operating surplus–the account from which distributions are paid. Cash flow also increased 24.1 percent in the third quarter, as the company purchased vessels from distressed owners and deployed these vessels in areas such as Australia and Brazil where day rates remain elevated.­­­

Management remains cautious in its outlook for the shipping market. With a distribution coverage ratio of 1.6 to 1, Navios Maritime Partners has plenty of insulation against further weakness.

All of the company’s vessels are under contract for the remainder of 2011; 92 percent of the fleet is under contract in 2012; and 73.7 percent will be under contract in 2013. The average contract sports a duration of four years. In 2011 the average day rate is $29,950; in 2012 the average day rate is $31,146; in 2013 the average day rate s $32,732. To put these figures into context, the average rate on the spot market is $13,531 per day.

Navios Maritime Partners protects these revenue streams against customer default with an agreement with an EU governmental agency that carries an AA+ credit rating.

This hasn’t assuaged investors’ concerns. Some readers have suggested that the EU institution insuring Navios Maritime Partners’ contracts is at risk of default, potentially leaving the company exposed to a wave of customers walking away from their contracts.

EU leaders’ plan to stem the sovereign-debt crisis may or may not calm investors’ anxieties. But that deal, combined with the Navios Maritime Partners’ solid third-quarter performance, should reassure anyone paying attention. Meanwhile, the company continues to put the pieces in place to grow its cash flow and distribution. Buy Navios Maritime Partners LP up to 20 if you haven’t already.

Penn Virginia Resource Partners LP (NYSE: PVR)

Penn Virginia Resource Partners LP will boost its quarterly distribution to 50 cents per unit–a 6.4 percent increase from year-ago levels. The MLP generated third-quarter DCF that was 8.4 percent higher than in the same period of 2010 and covered its distribution by a 1.02-to-1 margin.

Penn Virginia Resource Partners operates two businesses. The firm’s primary income stream comes from royalties collected from customers that produce coal from its mines. These fees are based on the amount mined and prevailing coal prices. The firm’s royalty income surged 17 percent from a year ago, bolstered by the January 2011 acquisition of the Middle Fork coal properties.

The MLP also owns and operates midstream natural-gas infrastructure. New acquisitions and organic growth projects fueled a 28 percent uptick in third-quarter throughput, though capacity constraints weighed on margins.

Management expects new projects to come online in the first quarter of 2012 that should relieve some of this margin pressure. Key initiatives include an expansion of its midstream systems in Marcellus Shale, including Phase 2 of the Lycoming System. Penn Virginia Resource Partners has also inked a joint venture with water utility Aqua America (NYSE: WTR) to build and operate a water system for a unit of independent gas producer Range Resources Corp (NYSE: RRC), a leading player in the Marcellus. This unique fee-generating asset offers plenty of opportunity for expansion if this initial foray proves a success. The 18-mile long first segment is expected to come on line in the first of quarter 2012.

These projects should fuel future distribution growth. Penn Virginia Resource Partners LP rates a buy under 28.