Conservative Portfolio

Buckeye Partners LP’s (NYSE: BPL) unit price tumbled to a 12-month low in May 2012 after the MLP announced disappointing results and failed to raise its distribution for the first time in 31 consecutive quarters.

The firm’s second-quarter financial results showed improvement and, at least temporarily, quelled speculation that a distribution cut could be imminent. Management also reaffirmed its previous guidance for the integration of newly acquired assets; if this process goes according to plan, Buckeye Partners should be able to grow its distribution in coming quarters.

Improved liquids storage capacity and demand boosted the MLP’s percentage of fee-based cash flow, a metric that’s essential at a time when commodity prices remain volatile and the shale oil and gas revolution continues to reshape the midstream landscape.

If Buckeye Partners can maintain and eventually grow its distribution, the stock should recover to the mid-$60s per unit. In the event that the firm is forced to trim its distribution, the stock could pull back to the low $40s per unit. Buckeye Partners LP remains a buy up to 60 for investors who can afford to take the risk.

Posting a total return of 19 percent thus far in 2012, units of Enterprise Products Partners LP (NYSE: EPD) have been one of our bigger winners this year.

Some of this outperformance comes from the blue-chip MLP’s solid execution, diversified asset base and ever-expanding slate of growth projects. At the same time, investors have also come to regard Enterprise Products Partners as a safe-haven stock and tend to bid up the unit price whenever uncertainty rears its ugly head.

With the August payment, the MLP has bolstered its distribution in 32 consecutive quarters. This latest boost was backed by a 12.6 percent increase in DCF from year-ago levels. More growth appears to be in the cards; Enterprise Products Partners is on track to complete $3 billion organic growth projects in 2012. Buy Enterprise Products Partners LP whenever the stock dips to less than 50.

Genesis Energy LP (NYSE: GEL) announced its 28th consecutive distribution increase, the 23rd of which exceeded an annual growth rate of 10 percent. A 35 percent upsurge in available cash before reserves, the account from which the company draws its distribution, enabled the MLP to cover its payout by 118 percent.

We expect Genesis Energy to continue its track record of distribution growth. A renegotiated credit agreement expanded the available amount to $1 billion and extended the maturity to July 2017. Management also has outlined a credible plan to increase operational efficiency and expand its asset base. Investors should buy Genesis Energy LP whenever the unit price dips to less than 30.

Of our Portfolio holdings, Magellan Midstream Partners LP (NYSE: MMP) posted the largest distribution increase in the second quarter, boosting the payout 12.2 percent sequentially by $0.9425 cents per unit. This announcement marked 10th consecutive quarter in which the firm has hiked its disbursement to unitholders.

During the quarter, Magellan Midstream Partners grew its DCF by 14 percent from year-ago levels, covering the payout by 126 percent. Much of this upsurge in cash flow stemmed from the addition of energy storage and transportation assets.

An increase in shipments and a higher tariff enabled the MLP to grow the operating margin from its petroleum pipeline system by 20.4 percent. Meanwhile, the firm’s petroleum terminals posted a 20.6 percent increase in operating margin, thanks to lower operating expenses and new assets coming onstream. But the MLP’s ammonia pipelines enjoyed the strongest quarter, with rising volumes, a higher average tariff and lower maintenance costs translating to a 125 percent increase in operating margins.

Magellan Midstream Partners plans to spend $500 million on expansion projects in 2012 and will allocate $200 million to these opportunities in 2013. These endeavors include the Crane-to-Houston crude oil pipeline that’s on track to hit full capacity of 225,000 barrels per day by mid-2013. In August, Magellan raised its 2012 distributable cash flow guidance by another $30 million and set a distribution growth target of 18 percent for 2012 and 10 percent for 2013. This impressive forecast has prompted us to increase our buy target for Magellan Midstream Partners LP to 70. With the stock trading at a frothy valuation, investors sitting on big gains should consider taking some profits off the table.

Spectra Energy Partners LP (NYSE: SEP) increased its distribution by 1.1 percent sequentially and 4.3 percent from a year ago–the 19th consecutive boost to the MLP’s quarterly payout. The MLP owns gas gathering, transportation and storage assets that supply electric utilities with the thermal fuel.

Much of Spectra Energy Partners’ growth prospects hinges on acquisitions and drop-down transactions from its general partner, Spectra Energy Corp (NYSE: SE).

In the second quarter, Spectra Energy Partners generated enough DCF to cover its payout by 114 percent, a solid margin considering the low-risk nature of its assets. Spectra Energy Partners LP rates a buy under 33 for its sustainable distribution and 6 percent yield.

Sunoco Logistics Partners LP (NYSE: SXL) increased its distribution for the 29th consecutive quarter; the MLP boosted its second-quarter payout 9.9 percent sequentially and 16.1 percent on a year-over-year basis. This latest distribution hike was supported by a 49 percent surge in DCF from year ago levels, a record high that covered the distribution by an impressive 355 percent.

A slight dip in operating income at the MLP’s refined-product pipelines was offset by a 36.2 percent upsurge in profit in the oil pipeline segment, a 62.5 percent increase in profit in the oil marketing division and a 79.4 percent jump in the terminal segment’s profit.

Sunoco Logistics Partners also refinanced higher-cost debt with lower-cost debentures.

Nevertheless, investors should remain cautious until Energy Transfer Partners LP’s (NYSE: ETP) acquisition of Sunoco Logistics Partners’ general partner closes. Sunoco Logistics Partners LP rates a buy up to 35, but investors sitting on significant gains should consider taking some profits off the table.

Growth Portfolio

DCP Midstream Partners LP’s (NYSE: DPM) stock has pulled back slightly this year, albeit not enough to bring the units below our buy target. The owner of midstream assets that handle natural gas liquids (NGL) suffered a 36 percent decline in its second-quarter cash flow, largely because of weak commodity prices. Nevertheless, management still hiked the distribution by 1.5 percent sequentially in anticipation of asset drop-downs and growth projects coming onstream. Not only have NGL prices improved since the end of the second quarter, but management also estimates that fee-based revenue will increase to 80 percent of total sales from 60 percent once the firm adds the Sand Hills and Southern Hills assets. We continue to rate DCP Midstream Partners a buy when the stock dips to less than 40.

Units of Eagle Rock Energy Partners LP (NSDQ: EROC) have lagged this year, though half of the stock;s loss occurred before we added the MLP to the Growth Portfolio in early March 2012.

Weaker NGL prices and unscheduled outages at the MLP’s natural gas-processing facilities in Alabama and Texas weighed on distributable cash flow (DCF) during the quarter, while throughput on its gathering system in the Texas Panhandle shrank 16 percent sequentially. Lower commodity prices also took their toll on the MLP’s upstream operations, where operating income tumbled 51 percent from year-ago levels.  

Fluctuations in commodity prices prompted management to maintain, not raise, the MLP’s second-quarter distribution and to scale back previously announced plans to boost the full-year payout to $1 per unit by the fourth quarter.

Despite these disappointments, Eagle Rock Energy Partners still managed to generate enough cash flow to cover its distribution and its shuttered gas plants are up and running again. The construction of compression infrastructure in Texas likewise continues apace.

Eagle Rock Energy Partners also announced the $227.5 million acquisition of two natural gas-processing plants and 2,500 miles of gathering pipelines in the Texas Panhandle as part of BP’s (LSE: BP, NYSE: BP) ongoing effort to divest noncore assets. The deal includes a 20-year, fixed-fee contract for gathering and processing services that covers BP’s existing wells and a two-year agreement covering any new wells drilled within a 2-mile radius. Throughput on these gathering pipelines averaged 180 million cubic feet per day in the first half of 2012, and volumes should ramp up as drilling activity in the Granite Wash continues to accelerate. Management expects the deal to be immediately accretive to DCF. Buy Eagle Rock Energy Partners LP up to 12.

Units of Energy Transfer Partners LP (NYSE: ETP) have given up 6.8 percent thus far in 2012, a transitional year in which the MLP divested its propane-distribution assets and significantly expanded its portfolio of NGL-related infrastructure.

Energy Transfer Partners’ acquisition of Sunoco (NYSE: SUN) is reportedly nearing approval. The MLP will combine these assets with those of the former Southern Union in a 40-60 joint venture with general partner Energy Transfer Equity LP (NYSE: ETE).

In the second quarter, the MLP grew its DCF 23.3 percent from a year ago, as the addition of new fee-generating assets offset weak commodity prices and restructuring costs. Although the firm’s cash flow covered 125 percent of the quarterly payout, management once again elected not to hike the distribution.

With management likely to approve a higher distribution once the acquisition of Sunoco closes, Energy Transfer Partners LP rates a buy up to 50.

Despite a 12 percent increase in DCF from year-ago levels, Regency Energy Partners LP’s (NYSE: RGP) second-quarter cash flow fell 9 percent short of covering its disbursement to common unitholders.

This uptick in DCF reflected throughput growth at its Lone Star joint venture with Energy Transfer Partners. We expect this system to continue to benefit from accelerating drilling activity and rising production in the liquids-rich Eagle Ford Shale.

Overall, Regency Energy Partners’ gathering and processing operations grew their margins by 22.6 percent, largely because of volume growth. However, the firm’s joint venture in the Haynesville Shale, a natural gas-focused region where drilling has slowed considerably, suffered from lower throughput.  

With management allocating between $775 million and $825 million to growth projects in 2012, the MLP’s margin of distribution coverage should improve. Whether these investments enable Regency Energy Partners to boost its distribution remains to be seen. Regency Energy Partners LP rates a buy under 29 for investors willing to assume a little extra risk.

Targa Resources Partners LP (NYSE: NGLS) raised its quarterly distribution 3.2 percent sequentially, effective with the August payment. Although the stock swooned in June and July, providing investors with a golden opportunity to buy, the unit price has since recovered.

The MLP’s impressive second-quarter results drove much of this upside, as the firm overcame the severe downturn in NGL prices to generate enough DCF to cover its distribution by 1.15 times.

Management also affirmed that in 2012 the MLP will invest 88 percent of its $650 million capital budget on growth prospects, suggesting that this upside will continue into next year. Although management remains cautious about the outlook for NGL prices, the firm stood by its previous operating and financial guidance. Buy Targa Resources Partners LP when the unit price dips to less than 39.

Units of Teekay LNG Partners LP (NYSE: TGP) have generated a total return of almost 27 percent thus far in 2012, largely because of investors seeking to add exposure to the tightening supply-demand balance in global markets for transporting liquefied natural gas (LNG).

Although the MLP’s distribution growth has paled in comparison to other Portfolio holdings, the firm’s DCF surged 12 percent sequentially in the second quarter and 51 percent from year-ago levels. This uptick in cash flow covered Teekay LNG Partners’ quarterly distribution by 130 percent.

Much of this upside stemmed from the purchase of four LNG carriers delivered between August 2011 and January 2012. The shipping MLP also bought a 52 percent interest in six LNG carriers, a liquefied petroleum gas carrier and a multi-gas carrier.

We expect additional deals in coming months, as the MLP takes advantage of its ready access to inexpensive financing. Teekay LNG Partners LP rates a buy up to 41.

Aggressive Portfolio

Units of Legacy Reserves LP (NSDQ: LGCY) have returned 4.5 percent this year, an underwhelming performance that reflects the challenges posed by fluctuations in energy prices. In the second quarter, flat production and falling price realizations–including a 14 percent decline for oil–eroded the upstream operator’s distribution coverage to 71 percent. Recent acquisitions led to a 4 percent increase in production expenses from year-ago levels.

Despite this disappointing second quarter, Legacy Reserves generated enough cash flow in the first half of the year to cover its distribution by 104 percent. Integrating the acquisition of seven producing properties should increase the firm’s DCF significantly in the last six months of the year. This prospect, coupled with recovering energy prices, has prompted management to boost its quarter distribution to $0.56 per unit. With a rich inventory of drilling locations and a current yield of roughly 8 percent, Legacy Reserves LP rates a buy up to 32.

Units of Mid-Con Energy Partners LP (NSDQ: MCEP) have tracked fluctuations in oil prices since we added the stock to the Aggressive Portfolio in early February. In the second quarter, the publicly traded partnership increased its production by 64 percent from a year ago, which translated into a 73 percent upsurge in DCF.

The MLP also announced the acquisition of two more oil-focused properties in Oklahoma that should boost overall production and contribute to the firm’s third-quarter DCF. Mid-Con Energy Partners also lowered its production costs, to $17.47 per barrel of oil equivalent from $19.67 per barrel of oil equivalent in the second quarter of 2011.

Although fledgling publicly traded partnerships often require a few quarters of operations to fully cover their distributions, Mid-Con Energy Partners generated enough DCF to pay 107 percent of its second-quarter disbursement. Management expects this coverage ratio to improve to 119 percent in the back half of the year, largely because of an uptick in production. Mid-Con Energy Partners LP rates a buy up to 26.50 for its favorable output mix and growth potential.

Navios Maritime Partners LP (NYSE: NMM) owns and operates a fleet of dry-bulk carriers that transport iron ore, coal, grains, fertilizer and other commodities.

During the quarter, the MLP acquired three vessels and grew its operating surplus (the account from which distributions are paid) by 2.8 percent from a year ago, enabling the shipper to raise its distribution to $0.4425 per unit from $0.44 per unit. These new vessels operate under contracts that generate a profit, even in a dry-bulk shipping market that faces a severe supply overhang.

Navios Maritime Partners’ fleet has an average of 3.5 years remaining on its fixture. However, this contract coverage declines to 78.3 percent in 2013 and 43.1 percent contracted in 2014. This imminent re-contracting risk explains why the stock yields 12 percent. Navios Maritime Partners LP rates a buy under 20 for aggressive investors.

Vanguard Natural Resources LLC (NYSE: VNR) will transition to a monthly distribution, beginning with its September disbursement. The MLP had increased its second-quarter payout by 1.3 percent, to $0.60 per unit, which implies a monthly distribution of $0.20 per unit.

Although second-quarter DCF tumbled 26 percent from a year ago and the firm covered only 60 percent of its payout, management remains bullish on the firm’s prospects in the back half of the year. As CEO Scott Smith reminded investors in the press release announcing Vanguard Natural Resources’ second-quarter earnings, the MLP allocated “over 40 percent of [its] initial [2012] capital budget on projects that contributed very little to date in terms of our reported production and cash flow.”

We expect the second half of the year to erase memories of a disappointing second quarter. Management’s current guidance calls for midpoint distribution coverage of 125 percent in 2012 and 135 percent in 2013, which suggests that the MLP will have ample scope to increase its distribution. Buy Vanguard Natural Resources LLC up to 30.