Whereas our Conservative Portfolio holdings benefited from investors’ flight to safety, our Aggressive and Growth Portfolios didn’t fare as well. Of course, there were a few exceptions: Names with exposure to rapidly growing production of natural gas liquids (NGL) from the Eagle Ford Shale and other emerging plays posted solid return in 2011.

Units of DCP Midstream Partners LP (NYSE: DPM) returned almost 35 percent this year, bolstered by an improved pricing environment and organic growth projects that came onstream in the Eagle Ford Shale and Midcontinent region. These investments have paid off for investors; DCP Midstream Partners has increased its distribution in five consecutive quarters. The firm’s fractionation assets already make it the leading NGL producer in the US, and management has about $4 billion worth of growth projects slated for 2011 to 2013.

Despite some gut-wrenching volatility along the way, units of Targa Resources Partners LP (NYSE: NGLS) finished 2011 up about 18 percent. The MLP has boosted its distribution in six straight quarters, and management’s outlook for the coming year calls for the firm to grow its cash flow and distribution between 10 and 15 percent.

Both Growth Portfolio holdings currently trade slightly above buy targets. Investors who own DCP Midstream Partners and Targa Natural Resources should likewise consider taking some profits off the table and reallocating them to names that trade below our buy targets. At the same time, investors looking to add exposure to either of these holdings should wait until their unit prices drop below our buy targets. DCP Midstream Partners LP rates a buy under 40; Targa Natural Resources LP rates a buy under 37.

That being said, we remain bullish on MLPs with exposure to rising production of NGLs from the nation’s shale oil and gas fields. (See The Saudi Arabia of Natural Gas Liquids.)

A replacement for oil derivatives such as naphtha in certain industrial applications, NGLs have historically tracked oil prices; with domestic natural-gas prices hovering near record lows, producers have ramped up output of NGLs to improve wellhead economics. We expect this trend to continue in coming years, as petrochemical outfits bring new capacity onstream in North America. NGL prices also continue to benefit from a robust export market, which also prevents supply from overwhelming demand.

The US market for natural gas, on the other hand, will remain closed for the foreseeable future. Several projects are under way that would allow producers to export liquefied natural gas, but these capital-intensive projects won’t come online until 2015 at the earliest–and that’s being optimistic.

Investors shouldn’t fret about overhyped regulatory threats to hydraulic fracturing, a key drilling technique that enables producers to tap reserves formerly trapped in shale fields and other “tight” oil and gas plays. Elliott addressed these concerns at length in Sound and Fury.

Meanwhile, oil prices have remained robust for much of the year. The price of West Texas Intermediate (WTI) crude oil soared to almost $115 per barrel in late spring after the outbreak of civil war in Libya disrupted the nation’s oil exports.

WTI plummeted to less than $75 per barrel in early October, reflecting logistical constraints at the key delivery point in Cushing, Okla. These capacity issues have improved somewhat over the past month, and WTI has rallied toward $100 a barrel.

Despite these challenges, the three upstream MLPs–firms that produce oil, NGLs and natural gas–in our Aggressive Portfolio held up reasonably well. Legacy Reserves LP (NSDQ: LGCY), Linn Energy LLC (NSDQ: LINE) and Vanguard Natural Resources LLC (NYSE: VNR) continued to benefit from conservative financial and operating policies, as well as aggressive hedging to minimize the impact of fluctuations in commodity prices. All three also managed to increase production volumes through acquisitions and stepped-up drilling programs.

We added Vanguard Natural Resources to the Aggressive Portfolio on Nov. 30, 2011, after the limited liability company absorbed former holding Encore Energy Partners LP. Since joining the portfolio, the stock has gained about 4.5 percent, moving our combined annual return from Encore Energy Partners and Vanguard Natural Resources into positive territory.

Despite solid operating results and steadily rising distributions, units of Linn Energy returned about 8.5 percent and units of Legacy Reserves returned about 3.5 percent. Much of this underperformance stems from perceived risks related to energy prices; all three names trade below our buy targets. Now is a good time to buy Legacy Reserves LP up to 32, Linn Energy LLC up to 40 and Vanguard Natural Resources LLC up to 30. 

All our other Growth and Aggressive Portfolio holdings that trade below are buy targets also continued to execute operationally and post solid distribution growth.

Units of Aggressive Portfolio holding Penn Virginia Resource Partners LP (NYSE: PVR), for example, eked out a total return of 3.7 percent in 2011, despite growing its distribution and adding a number of valuable assets. The MLP also absorbed its general partner, eliminating costly incentive distribution rights (IDR) that diluted investors’  returns. Penn Virginia Resource Partners LP, which owns and manages 804 million tons of coal reserves primarily in Central Appalachia, continues to rate a buy up to 29.

Investors spurned Growth Portfolio holding Teekay LNG Partners LP (NYSE: TGP) because of a dismal operating environment for firms specializing in seaborne transportation. But the market for tankers that transport liquefied natural gas–Teekay LNG Partners’ bread and butter–was the industry’s lone bright spot in 2011.

The MLP owns a fleet of 20 ships that transport liquefied natural gas (LNG), five vessels that carry liquefied petroleum gas (LPG), and 11 conventional oil tankers. Nine additional LNG tankers will join the fleet over the next six to 12 months.

Teekay LNG Partners leases these vessels to customers for a daily fee, and virtually all the company’s ships–including those soon to be delivered–are booked under long-term charters that guarantee cash flows for the duration of the contract. The average time charter covering the MLP’s LNG tankers is 16 years, while the firm’s LPG carriers have an average of 15 years remaining on their outstanding time charters. The company’s oil tankers average 10 years of contract coverage.

Day-rates in the oil tanker business continue to hover around multiyear lows because an influx of new vessels–ordered in 2005 and 2006, when day-rates were near a record high–have swamped demand. In many instances, rates in the spot market and on new time charters have collapsed to levels where many operators can’t even turn a profit.

But conditions in the market for LNG and LPG carriers remain sanguine: Neither faces an oversupply of vessels, and day-rates offer attractive returns on investment.

Demand for these ships has expanded after the devastating earthquake and tsunami that hit Japan’s Tohoku region and the subsequent disaster at the Fukushima Dai-ichi nuclear power plant. Japan had generated about 30 percent of its power from nuclear energy. Previous plans to have nuclear power contribute 40 percent of the nation’s electricity by the decade have been shelved for the time being. All of the reactors at the Fukushima Dai-ichi site have been permanently closed, and Japan has idled much of its nuclear capacity for safety inspections. Some of these nuclear power plants are unlikely to reopen.

To replace this lost capacity, Japan will turn toward natural gas-fired plants that emit less carbon dioxide than coal-fired plants and can be built relatively quickly. Japan lacks domestic natural- gas reserves and continues to step up its LNG imports to offset lost nuclear power. The nation in October imported 6.12 million metric tons of liquefied gas, up 17.9 percent from year-ago levels.

Germany has also shuttered all of its older reactors and plans to close all of its reactors by 2022. Nuclear power accounts for about 25 percent to 30 percent of Germany’s electric supply; natural gas-fired plants will replace much of this lost generative capacity. LNG will fill some of the supply gap, as Germany attempts to limit its dependence on pipeline gas from Russia.

These developments have elevated day-rates on LNG tankers significantly and ledvshippers to seek longer-term deals to ensure they have sufficient capacity to transport cargoes of liquefied gas.

Although investors are understandably wary of the tanker industry, the company has little in common with Frontline (NYSE: FRO) and other outfits that own oil tankers. In fact, Teekay LNG Partners grew its distribution by 5 percent during the year and announced a 7 percent increase for 2012 after adding eight vessels to its fleet. Take advantage of the market’s misperception and buy Teekay LNG Partners LP up to 41.

Aggressive Portfolio holding Navios Maritime Partners LP (NYSE: NMM) also suffered from investors’ misperceptions. To be sure, the market for dry-bulk carriers is burdened with overcapacity, as retirements of older ships have lagged new deliveries from the shipyards. This excess supply has depressed day-rates in the spot market and on longer-term fixtures–a daunting challenge for operators that are overleveraged or primarily serve the on-demand market.

But Navios Maritime Partners has the majority of its fleet booked under long-term contracts that are insured against default. Better still, the firm has taken advantage of its competitors’ distress to augment its fleet on the cheap. The savvy moves have enabled the company to grow its distribution; we expect the MLP to hike its payout at least once in 2012.

With investors shunning shares of seaborne shippers, units of Navios Maritime Partners gave up 16 percent this year. This is another opportunity for investors to profit from unwarranted panic; buy Navios Maritime Partners LP up to 20. That being said, investors shouldn’t expect the stock to reverse course overnight and shouldn’t pile too much money into the stock.

Units of Aggresive Portfolio holding Energy Transfer Partners LP also finished 2011 on a down note, closing the year with a 4.5 percent loss. Investors have punished the MLP for the drop-down acquisition of Citrus Corp, which owns a gas pipeline in Florida, from its general partner, Energy Transfer Equity.

The assets involved in this deal will provide an accretive, low-risk source of cash flow growth for Energy Transfer Partners, but the cost–$2 billion in cash and equity–has some investors up in arms. Not surprisingly, the units plunged from about $55 in early May to barely $38 in early October.

Energy Transfer Partners subsequently announced the $2.9 billion sale of its propane distribution operations to AmeriGas Partners LP (NYSE: APU). The Federal Trade Commission has asked for more information on that deal, but the companies still expect to close in the first quarter of 2012. That will effectively eliminate financing risk for the drop-down transaction and provide Energy Transfer Partners wth a large interest in a bigger and stronger AmeriGas Partners LP.

Yielding almost 8 percent and poised to grow its distributable cash flow, Energy Transfer Partners LP is a solid buy up to 50 for those who don’t already own it.

Units of Regency Energy Partners LP (NYSE: RGP), an Aggressive Portfolio holding that also counts Energy Transfer Equity as its general partner, also endured a difficult 2011 and finished 2011 down 2 percent.

Despite the potential for drop-down transactions, investors remain concerned that its general partner’s acquisition of Souther Union will have a negative impact on the overall organization’s access to capital. Regency Energy Partners continues to focus on expanding its NGL-related midstream assets in a joint venture with Energy Transfer Partners. Two consecutive boosts to the MLP’s quarterly distribution suggest that this project is going well. Regency Energy Partners LP  rates a buy up to 29 for those who don’t already own it.

We saved the bad news for last: For the first time in the history of MLP Profits, the model Portfolios included a significant loser in 2011. Units of Inergy LP (NYSE: NRGY), which owns midstream gas and NGL assets and a propane distribution business, gave up 32 percent in 2011.

The MLP has not cut its distribution to date. Nor has management indicated that a cut is imminent, even though the firm hasn’t generated enough distributable cash flow to cover its distribution in recent quarters. The unit price, however, has certainly behaved as though Inergy will slash its dividend, tumbling from more than $40 in early may to a low of $22 in December. Nevertheless, the stock’s current yield of 11.5 percent isn’t the highest in the model Portfolios–that “honor” belongs to Navios Maritime Partners.

But December did bring some good news from the embattles MLP.

First, the MLP placed an initial public offering for its 16 million units of its energy midstream operations, dubbed Inergy Midstream LP (NYSE: NRGM). The new MLP will use the $252.3 million raised, along with $82.7 million from the revolving credit facility, to pay off $255 million of debt assumed from parent Inergy LP. The spin-off will also pay a special cash distribution of $80 million to the parent to reimburse capital expenditures incurred.

Inergy LP now owns 78.5 percent of Inergy Midstream and, as the general partner, is entitled to 78.5 percent of the new MLP’s cash flow. That percentage would drop to 75.2 percent if the transaction’s underwriters  exercise their maximum allotment, but Inergy LP would then receive another $39 million.

Finally, as GP, it will own IDRs for 50 percent of the cash distributed in excess of 37 cents per unit per quarter. That’s the initial rate Inergy Midstream will pay, giving Inergy LP a healthy cut of any growth. Inergy Midstream is projected to grow its cash flow by at least 65 percent in fiscal year 2012 (ended Sept. 30) as additional storage and transportation capacity comes onlne. That should ensure solid coverage, as well as regular distribution increases.

Will the deal be enough to save Inergy LP’s current distribution? In the short term, these moves reduce the firm’s debt and interest-related expenses while mantaining Inergy LP’s exposure to growing cash flow from the spun-off midstream assets.

By selling a 21.5 percent to 25.8 percent stake in its midstream assets, however, Inergy LP loses some potential cash flow. If projections for Inergy Midstream’s cash flow growth materialize, the parent will still see at least a 23 percent jump in cash flow, not counting the benefit of reducing debt. But Inergy Midstream’s units yielded 7.4 percent at their initial public offering–considerably higher than most midstream-focused MLPs.

Also, from here on out, reaping a profit from propane distribution will be critical. Last year’s cash flows were hurt by a spike in the cost wholesale propane, which encouraged customers to reduce the size of their orders. Year-over-year comparisons won’t suffer nearly as much in 2012, if for no other reason than wholesale propane sales were coming off low levels. But results from the current quarter (due Feb. 1) will be telling.

Inergy LP’s current unit price reflects these risks. Assuming that the MLP’s operating results meet expectation, the distribution should be safe. Of course, management may elect to slash the payout anyway. But we’re willing to stick with Inergy LP as a hold. We will continue to monitor this situation closely.