Portfolios: Growth Still on Track

By Roger Conrad • May 31, 2011

Many investors would rather avoid picking individual stocks. In the 1980s they bought mutual funds. In the ’90s they moved onto index funds. Today exchange-traded funds (ETF) are most popular.

We cover a wide range of ETFs and funds in How They Rate. Generally, we’re not impressed. Most funds have lagged the indexes, which themselves lag a well-positioned basket of individual MLPs because they own the good, bad and ugly of an industry.

Fortunately, there is one notable exception: Closed-end fund Kayne Anderson Energy Total Return Fund (NYSE: KYE). The fund has been a member of the MLP Profits Portfolio since our first issue in May 2009, rewarding us with a 110.6 percent total return that combines a quarterly dividend of $0.48 a share with robust capital growth.

Unlike open-end mutual funds–which constantly issue and redeem shares as investors buy and sell–closed-end funds trade a fixed number of shares on major exchanges. You buy them as you would any common stock. Managers don’t have to make redemptions or invest new money, so they can always run the portfolio as they see fit.

The bulk of Kayne’s portfolio is US-based MLPs, supplemented by a smattering of Canadian energy producers, energy company bonds and C Corps, including MLPP Aggressive Holding Navios Maritime Partners LP (NYSE: NMM). Kayne’s largest holding as of the end of the first quarter was Kinder Morgan Management LLC (NYSE: KMI), which owns the general partner interest in Conservative Holding Kinder Morgan Energy Partners LP (NYSE: KMP).

Like all closed-end funds that hold MLPs, Kayne Anderson Energy Total Return sends out a Form 1099-DIV at tax time, not the often-dreaded K-1. This makes them ideal for IRA investors who want to avoid any issues related to K-1s or UBTI (unrelated business taxable income). They’re also an easy way to hold a bunch of these securities at the same time with a relatively small minimum investment.

Kayne’s performance has been impressive, besting the Alerian MLP Index by some 16-percentage points since our initial recommendation. And given the high portfolio quality and management’s solid record, smart money’s on a repeat outperformance.

Because of their IRA advantages, closed-end funds owning MLPs tend to sell in the stock market at prices above their net asset value, or “premiums.” All open-end funds, in contrast, always sell for their NAV, or the value of their underlying assets.

Kayne is no exception, selling for a premium of 4.94 percent at last count. That’s a fraction, however, of the 10 to 20 percent premiums offered by rivals. Moreover, Kayne’s yield of roughly 6.58 percent is equivalent to the average yield of its holdings. That’s a sure sign it’s achieving its performance without excessive use of leverage and risk.

Kayne Anderson Energy Total Return Fund, consequently, remains our top choice for those who want a mutual fund of MLPs. Buy up to our target of 27. Note that we do track MLP ETFs in How They Rate. All currently rate holds, mainly because we believe you can do much better buying individual MLPs, or, failing that, the Kayne fund.

When you shop for individual MLPs, you always know what you own and what your distributions are going to be. And you can narrow your holdings down only the sector’s best, as well as the companies that best match your risk profile.

Helping you pick the industry’s best is our job at MLP Profits. Individual MLPs vary widely based on both their financial and operating numbers and business risk. And what’s a proper amount of risk/reward for some investors is definitely inappropriate for others.

To meet the needs of our readers, we’ve constructed three portfolios, each with a slightly different risk/reward flavor. The primary line of demarcation is direct exposure to commodity prices.

  • Conservative Holdings. These are MLPs that draw revenue almost entirely from energy infrastructure assets that produce fees, such as pipelines, processing centers and storage facilities. The primary customers are big energy producers and consumers that are extremely creditworthy and vary throughput very little based on oil and gas prices. In fact, many contracts are based on capacity, so the MLP gets the revenue even if the customer isn’t using the asset. The upshot is revenue is very secure and companies increase it every time they add a new asset. That new revenue then flows through into distribution increases.
  • Growth Holdings. These MLPs own mainly fee-generating assets such as those operated by our Conservative Holdings. But they also have some exposure to energy prices that makes revenue slightly less predictable. They do best when energy prices are high and rising but will be able to absorb setbacks along the way without affecting distributions. They raise distributions when energy prices rise and when they add new fee-generating assets.
  • Aggressive Holdings. These MLPs rely on businesses that depend on commodity prices, including producing oil and gas. Our picks have tempered their energy price exposure by hedging the prices of outputs and inputs. That’s given them a huge cash flow advantage over rivals, which they’re using to pick up new properties on the cheap, expanding output and providing the cash flow to pay a rising stream of dividends. At the end of the day, however, they rely on energy prices to stay high enough to keep their business profitable, and they always do best when oil and gas prices are rising, which we believe will be the trend for at least several more years.

Note that we’ve generally advised avoiding non-energy related MLPs. These are basically tax dodges set up by various entities to take advantage of tax breaks set up to encourage energy asset building. They were nearly put out of business last year by legislation to tax carried interest used by hedge funds, and they’re very much potentially in the line of fire.

Also, non-energy businesses generally have very sketchy track records of being able to hold dividends at current levels, let alone increase them. Some, like AllianceBernstein Holding LP (NYSE: AB), feature lofty looking yields. But you’re far better off selling and swapping to one of our first-rate energy MLPs.

AllianceBernstein, for example, paid investors a quarterly dividend of $1.20 per unit in November 2007. That shrank to just $0.07 in May 2009, pushed up to $0.67 in November 2009 and fell to $0.12 in November 2010, before rising to the current rate of $0.42 cents. That may suit some investors, but it’s clearly not acceptable for anyone living off distribution checks. And again, this is a financial construct likely to face extinction if Washington ever acts on carried interest taxes. Why take the risk?

How should investors allocate between Aggressive, Conservative and Growth holdings? The main thing to remember is that no investor should put more than 20 to 25 percent of their portfolio into any one sector, and that includes MLPs.

As we’ve written several times in the past month, the trial balloon sent up by the US Treasury Dept to tax MLPs stands little or no realistic chance of becoming law. But it’s undeniable that a change in tax–however improbable–would have an impact on MLP unit prices. And you never want to be in the position as an investor where a single improbability can sink your whole portfolio.

The MLPs we recommend are all solid and growing businesses, where the tax advantage is just the icing on the cake. All would still be very strong businesses were they to be taxed less advantageously. But they’re best held as part of a diversified portfolio, not an entire portfolio.

That being said, investors should focus on the MLPs that best suit their investment style and risk tolerance. Those who want tax-advantaged income with minimal risk should stick mainly with Conservative Holdings. Unit prices of these can be volatile in a severe market downturn, as they proved in 2008. But so long as the underlying business is sound, distributions will continue to rise and unit prices will ultimately recover. That was the clear lesson from the aftermath of 2008.

Those who want to bet on the highest-octane plays should stick mainly with Aggressive Holdings. Not coincidentally, this is the group from which most of our biggest winners thus far hail, as they’ve been able to take advantage of higher oil prices and the explosion of demand for natural gas liquids (NGL). The flipside is volatility is generally greater too. Don’t buy any of them unless you can stomach an occasional dip.

Lastly, the Growth Holdings present something of a mix between Aggressive and Conservative holdings. They’re a great group to focus on if your interest is high income with solid growth, but without the volatility of a producer.

Most investors should probably own eight to 10 recommendations, with some drawn from each group. Remember to buy only when prices trade at or below our entry point targets. Alternatively, set some “dream” buy prices for MLPs you want to own at levels well below current prices. You may not be exercised. But if you are, you’ll own first-rate stocks at much lower prices than we’re seeing today.

More Bullish Numbers

The fundamental bull case for MLPs is based on two pillars. The first is record-low capital costs, both for debt and equity. The second is a seemingly limitless number of potential low-risk projects that will add to cash flow and boost distributions and unit prices, thanks to an explosion of shale oil and gas production and a severe lack of needed infrastructure to get it to market.

It works like this. MLPs identify new projects, in large part by talking to their customers to identify needs. They then produce a plan, sign on customers in advance and raise the money. Both debt and equity capital are historically cheap to raise here in mid-2011, as they have been the past year-plus. As a result, even the most conservative project boosts cash flow at a low cost, and MLPs pass the balance along as distribution increases.

This bullish case definitely showed up in the numbers of MLPs we’ve reported on in prior issues. And it was true of the seven Portfolio recommendations highlighted below.

It’s also important to note that these MLPs in a pinch could refinance debt due the next two years and fund their capital spending with existing cash flows. A spike in interest rates could hurt their ability to grow by raising the cost of capital.

Should that happen, however, they’d still be able to complete existing projects largely without resorting to issuing more debt or equity, as well as run existing assets. In other words, they could simply wait out a 2008-style credit crunch, returning to the market to finance new projects when conditions normalized.

“By the Numbers” shows how each of our Portfolio companies stack up by the elements of the MLPP Safety Rating System. These are distribution coverage, fee-based income as a percentage of total income, debt coming due through 2012 and distribution growth. MLPs get a point for each earned.

Note that low-rated MLPs can be buys, just as highly rated MLPs can be sells. That’s because price matters. A riskier investment can be your best buy if the price is right and you’re ready to face the danger. A safer play can be a sell if the price is bid too high.

Here are comments on the rest of the MLP Portfolio earnings. Here are the articles where you’ll find analysis of the rest of the first quarter numbers.

Conservative Holdings

Growth Holdings

Aggressive Holdings

Starting with the Conservative Holdings, Genesis Energy LP (NYSE: GEL) posted a 76.2 percent jump in “available cash before reserves,” which management defines as its primary measure of profitability. That was a coverage ratio of 1.21-to-1, based on the $0.4075 per unit paid on May 13. That was the 23rd consecutive quarterly boost and a double-digit increase over the first-quarter 2010 payment, an extremely bullish trend that shows no sign of slowing down.

The key is management’s continuing ability to pinpoint new low-risk energy infrastructure projects, sign on customers and finance them cheaply, boosting cash flows. In April Genesis launched a series of projects to expand rude oil infrastructure in Texas. The MLP bought three storage tanks in Texas City with barge dock access, approximately 1.5 miles from its existing Texas pipeline system.

It also began adding storage at its West Columbia facilities and constructing interconnecting pipeline and other facilities to transport crude oil production from the Hastings Field. Hastings is an older field using CO2 injection to boost yield. It began construction of a new sour gas processing facility to be installed at Holly Refining and Marketing’s refining complex in Tulsa, Okla.

In the company’s news release and conference call, CEO Grant Sims noted the increasing integration of Genesis’ various assets and operations. He also forecast further expansion of similar projects in Texas crude oil infrastructure and refinery service facilities. Such projects are “organic,” meaning they don’t require making expensive acquisitions and rely on intelligence only management has. The exception late last year was the transaction to buy half of the Cameron Highway Oil Pipeline Company, which lifted fee-based income by $6 million and opens the door to further organic expansion going forward.

Genesis also derives income from sales of NaHS (Sodium Hydra Sulfide), a chemical compound used in paper manufacturing and copper mine (43 percent of demand). Sales volumes increased by 12.5 percent in the first quarter to 37,233 dry short tons. Demand for NaHS in the Americas has improved over the past year, as activity in both copper mining and pulp and paper have surged.

This business is hypothetically exposed to the economic cycle and commodity price swings. So are the sales of fuel oil and other heavy-end petroleum profits sold though the supply and logistics segment, crude oil gathering and marketing and day-rates for barge operations.

Genesis, however, suffered little if any interruption of revenue during the 2008 market crash/credit crunch, when oil prices fell from over $150 to less than $30 a barrel. That’s a strong testament that these operations are more all-weather than they may seem, as well as the MLP’s strong grounding in fee-based businesses that have proven their stability in the worst possible environment.

Genesis units have been quite volatile this year, surging to nearly $30 in late February before falling below $26 in the recent MLP tax panic. They’ve since stabilized but still trade with a solid yield of 6 percent plus. Genesis Energy LP is a strong buy for even the most conservative investors up to 28.

Magellan Midstream Partners LP’s (NYSE: MMP) management has raised 2011 guidance for distributable cash flow by $30 million to approximately $440 million. And it continues to target annual distribution growth of 7 percent. The May 13 payment of $0.77 per unit was 6.9 percent above 2010’s tally and marked the fifth consecutive quarterly boost since Magellan bought out its general partner interest.

As for first-quarter results, Magellan beat its guidance for net income per unit, a measure that excludes non-cash items such as the impact of energy price changes on the value of hedge positions, by nearly 50 percent. Distributable cash flow surged 38 percent, producing superior distribution coverage of 1.36-to-1. That’s a sizeable cushion for the current income stream and, coupled with the MLP’s growth plans, sets the stage for even more robust distribution growth ahead.

In the MLP’s first-quarter conference call, CEO Mike Mears pointed to solid performance at all of the company’s business segments, as well as benefits from “recently-completed acquisitions and growth projects, improved demand for petroleum products and higher petroleum prices.” Pipeline income surged 22.8 percent, as shipments of gasoline and diesel on the company’s network surged and acquisitions paid off.

Excluding the Texas pipelines acquired in September, pipeline volumes rose 9 percent. The division also benefitted from higher fees for leased storage and ethanol blending and the MLP enjoyed a 2 boost in transport rates primarily due to longer haul shipments.

Magellan’s petroleum terminals saw a 29.5 percent boost in profit. The key was the acquisition of crude oil storage facilities in Cushing, Okla., also purchased in September. Other pluses at this very low risk business were higher ethanol fees and increased throughput volumes at the inland terminals. The company also benefitted from more favorable product pricing, which boosted profit on the margins.

When Magellan was first spun off from Williams Companies (NYSE: WMB) more than a decade ago, its foundation asset was an ammonia business. Since then this asset has gradually shrunk in relative importance to the organization, as the company has added primarily petroleum infrastructure assets and the corrosive nature of the operation has increased costs. But Magellan reported solid first-quarter results on higher shipments, with operating margin moving ahead $2.6 million to $3.7 million despite higher “remediation” costs.

That’s a solid foundation from which to pursue future growth. Management currently expects to spend $225 million on new projects this year, based solely on work in progress. It also has an inventory of more than $500 million of potential growth projects, such as the potential reversal and conversion of a portion of the partnership’s Houston-to-El Paso gas pipeline to crude oil service. The company also expects to see a 6.9 percent boost in tariffs overall for the second half of 2011, as it resets rates to reflect inflation measures.

All this points to more low-risk cash flow growth for Magellan, with robust distribution growth resulting. The units briefly went below our buy target of 58 earlier this month. These results, however, earn Magellan Midstream Partners–which meets all four of our Safety Rating criteria–a boost in our target to 60 for those who don’t already own it.

Spectra Energy Partners LP (NYSE: SEP) also draws an MLPP Safety Rating of 4. In fact, with basically 100 percent fee-generated income, it’s arguably the safest MLP on the list. First-quarter distributable cash flow (DCF) again covered the distribution by a solid 1.19-to-1 margin, a very comfortable cushion for the $0.46 per share quarterly payment on May 13. That was the 14th consecutive quarterly boost, one for every reporting period since the MLP’s inception.

The MLP reported a 25.1 percent jump in DCF, in large part the result of higher earnings from the Gulfstream pipeline system. That, in turn, was due to the “drop down” of another 24.5 percent interest in the system from parent and general partner Spectra Energy (NYSE: SE).

The parent has been the primary source of the MLP’s growth in the first few years of its life. That’s likely to remain the case for some years ahead. Fortunately, as the parent uses the MLP as a cash cow for cash generating assets, owners of the MLP will gain from continued robust dividend growth. And Spectra intends to spend more than $1 billion a year on further infrastructure expansion in the coming years, providing an even greater pool of assets for mutually beneficial dropdowns.

As CEO Gregory J. Rizzo noted in the first-quarter conference call, the MLP is on track to achieve its 2011 growth outlook. That’s derived from a combination of both operating assets and equity investments in assets such as Gulfstream, of which the MLP now owns 49 percent.

An example of the former is the planned acquisition of a 70-mile regulated natural gas pipeline system from EQT Corp (NYSE: EQT) dubbed Big Sandy. The eastern Kentucky asset will cost $390 million and will be financed by a combination of debt and equity when it closes in the third quarter of 2011. It has daily capacity of 171 million cubic feet natural gas equivalent and is interconnected with the Tennessee Gas Pipeline system, which links Huron Shale and Appalachian Basin natural gas supplies to the Mid-Atlantic and Northeast markets.

Spectra will retain EQT as the primary transporter, with over 80 percent of capacity locked in with a 16-year contract. It will be immediately accretive to cash flow, with potential for much more as it widens the MLP’s operations in the region. In addition, oil and gas producer EQT will be plowing back funds into developing its own lands, which promise to increase system throughput further, and provide opportunities for further expansion of Big Sandy.

That all sets up well for Spectra’s future cash flow and dividend growth, which is among the most recession resistant in the business. Buy Spectra Energy Partners up to our target of 33 if you haven’t yet.

Like all Growth Holdings, DCP Midstream Partners LP (NYSE: DPM) derives income from a combination of fee-based operations centered on energy infrastructure assets and operations that are more commodity price sensitive, as well as operations that have some of both. And example of the latter is a pair of natural gas liquids (NGL) fractionation facilities in Colorado, purchased for $30 million in March. Already the largest gas gatherer and processor, DCP will deliver NGLs to the fractionators under a long-term contract with fee-based margins.

According to CEO Mark Borer, “Financial results were in line with our 2011 forecast” and the MLP is “on track to deliver on our 2011 distributable cash flow forecast.” In addition, he’s “optimistic about our growth outlook, including continued opportunities to invest with our general partner to grow the overall DCP enterprise.” That will no doubt include more acquisitions, fueled by the combined financial strength of general partner owners Spectra Energy and ConocoPhillips (NYSE: COP).

Turning to existing operations, natural gas services operations income slipped slightly this year, due in part to the temporary impact of the moratorium on drilling in the Gulf of Mexico. That should unwind going forward as activity resumes. Wholesale propane logistics operations in contrast saw a 58.1 percent boost in profits, thanks to higher unit margins and the acquisition of the Chesapeake propane terminal.

DCP’s increasing involvement in the NGL business is one factor that attracted us to the MLP. And first-quarter results had no disappointments on that score. Profits surged 73 percent to $6.4 million, thanks in large part to acquisitions of the Marysville NGL storage facility and the purchase of an additional interest in our Black Lake NGL pipeline.

DCP is the largest producer of NGLs in the US, with about 18 percent output from processing plants. The company is involved across the board in NGLs, including gathering, processing, treating, storing and marketing. All promise to be solidly profitable going forward, both at existing assets and as management expands the portfolio. One aspect of management’s strategy is geographic consolidation to improve scale. Southeast Texas is one example of such concentration. And opportunities continue to ramp up in other areas as well.

DCP’s addition of fee-generating assets has stabilized cash flows to a great extent. And management has eliminated commodity price exposure on about 90 percent of operating profit for 2011, either with fee-earning assets or financial hedged. Even so there is still commodity price exposure, which is why DCP doesn’t earn all four criteria of our ratings system. Also, the propane sector involvement means profits are somewhat seasonal with fourth-quarter distribution coverage always deeper than that in the warmer months.

Nonetheless, full-year coverage is still solid at 1.1-to-1. And given the company’s robust growth opportunities, the commodity price exposure is more than offset by potential upside. Yielding a bit over 6 percent, DCP Midstream Partners is still a buy up to our target of 40.

Energy Transfer Partners LP (NYE: ETP) hasn’t been significantly more volatile than any other MLP Profits Portfolio recommendation this year, at least in percentage terms. As a relatively high priced MLP, however, the units’ gyrations have set off alarm bells with some investors, particularly after this month’s drop from around $55 to the neighborhood of $48.

The dip began at approximately the same time the MLP, and its general partner Energy Transfer Equity LP (NYSE: ETE), announced the close of the $1.925 billion cash purchase of midstream energy assets owned by Louis Dreyfus Highbridge Energy. Energy Transfer Partners’ partner in the deal is fellow MLPP Portfolio Holding Regency Energy Partners LP (NSDQ: RGNC), which will hold 30 percent to Energy Transfer’s 70 percent. Regency’s general partner is also Energy Transfer Equity.

The venture–dubbed ETP-Regency Midstream Holdings–will own an NGL storage, fractionation and transportation business mostly located in Texas and Louisiana. It will also construct a 100,000 barrels per day NGL fractionation facility at Mont Belvieu, Tex. Much of the capacity will be used by ETP to handle NGL delivered from its Jackson County, Tex., processing plant. That in turn is supported by a series of 10-year contracts newly inked with producers in Texas’ Eagle Ford Shale region.

This is a truly bullish deal for Energy Transfer’s long-term wealth-building ability. On the other hand, it will require a substantial amount of cash now, both internally generated and raised on the capital market. As such, this move also appears to delay a distribution increase, which I had expected to see this spring based on prior management statements and the completion of two major pipeline projects in December.

A distribution increase would have been welcomed by the market and very likely would have pushed the unit price up this month. The lack of one, conversely, provided some investors with a reason to sell an MLP that had been hitting new highs.

The bottom line, however, is that Energy Transfer is certainly capable of financing this move, which will dramatically enhance future cash flows. And by making it management has laid the groundwork for a much higher unit price in the next 12 to 18 months. Granted that’s beyond the time horizon of, unfortunately, a large number of investors in this volatile market. But the 7.5 percent yield–well covered by cash flows–should be a powerful incentive to stick around.

First-quarter distributable cash flow (DCF) fell 12.4 percent $337.1 million, a decrease of $47.5 million from the three months ended Mar. 31, 2010. That still left a very healthy coverage ratio of 1.81-to-1 in the quarter. Profits, however, are front-loaded owing to the propane operation. Full-year DCF coverage, for example, was a lot closer to 1-to-1.

The shortfall from last year in DCF was primarily due to what should be a one-time factor, the withdrawal of less natural gas from storage. That plus a drop in propane consumption, due to milder weather and customer conservation, directly hit realized margins from that fee-driven business and therefore went straight to the bottom line. Looking underneath that headline figure, however, operations were in good health and poised for growth.

The quarter was the first full reporting period since the December completion of the Tiger Pipeline and Fayetteville Express pipelines. Both are on track for a giant leap in cash flow in the second half of 2011, as demand and fees ramp up. Margins on natural gas sales continue to improve, thanks entirely to a system-wide efficiency program. Interstate pipeline income surged 65 percent over 2010 levels. And NGL volumes–which will see a mighty increase due to the Regency venture–are increasingly healthy.

Management is sticking with its forecast of a distribution increase later this year. That’s a nice vote of confidence in this MLP’s prospects at a time when some investors appear to be giving up. So is a recent burst of insider buying. Energy Transfer Partners remains a buy up to 55 for those who don’t already own it.

Inergy LP (NYSE: NRGY), like Energy Transfer an MLP with its origins in propane distribution, has increasingly turned to energy infrastructure for growth. That formula produced reliable distribution growth for many years but has stalled over the past year, in part as the company has absorbed the takeover of its general partner.

The current yield is generous, approaching 8 percent. But the key question is when distribution growth can resume, providing an upward lift to the unit price. Cash flow for the quarter ended Mar. 31 (Inergy’s fiscal second quarter), adjusted for one-time items, moved up 5 percent. It was also up 12 percent for the first six months of the fiscal year.

As CEO John Sherman stated, however, “Our performance in the second quarter was mixed,” mainly because “the propane business faced a challenging operating environment.” That was essentially offset by the company’s expansion in core midstream energy markets.

Retail sales of propane fell to 129.7 million gallons, versus 147.2 million gallons a year ago. That took down profit in that segment by roughly 7.9 percent. And it was only partly offset by gross profit from other propane operations, including wholesale, appliances, service, transportation and distillate sales.

Meanwhile, on the midstream side, gross profit surged 52.7 percent to $45.8 million in the quarter and 42.3 percent for the six months ended Mar. 31. That was spurred by investment in NGL assets, such as LPG (liquefied petroleum gas). Inergy continues to ramp up its presence in the gas liquids rich areas of the Marcellus and Eagle Ford shale regions, which will further increase cash flows from this business going forward.

The MLP’s Tres Palacios project in Texas is progressing “in line with expectations” according to Mr. Sherman. The CEO also cited the company’s Northeast operations for strong performance, stating “access to our system up there continues to be coveted by the market” and that Inergy has “recently renewed and extended contracts at attractive rates…currently receiving production flows from Marcellus.”

It’s this midstream business growth that provides the upside for Inergy unitholders going forward. The units have been volatile this month, basically mirroring the action in Energy Transfer Partners. That action is likely to continue until there’s a resumption of dividend growth. That, in turn, could be delayed to the start of fiscal 2012 (October) given management plans to spend up to $1 billion on midstream expansion projects this fiscal year. Also, full-year DCF coverage of the distribution is close to 1-to-1.

Inergy’s yield and reliable growth path, however, make it worth the wait for growth. Our buy up to target for Inergy LP remains 41, or roughly 10 percent above the current price, for those who don’t already own units.

Teekay LNG Partners LP (NYSE: TGP) rolled up a 15 percent boost in first-quarter 2011 distributable cash flow over last year’s level. That was a very sound number indeed, considering the general disrepair of the shipping business and is a testament to management efficiency and the strength of its niche transporting liquefied natural gas and liquefied petroleum gas, as well the conventional tankers under operation.

Teekay LNG also continues to benefit from its relationships with parent and general partner owner Teekay Corp (NYSE: TK). The MLP acquired the parent’s 33 percent interest in four new Angola LNG carriers during the quarter, all slated for delivery in 2011 and 2012. Those are high-quality vessels that will immediately add to partnership cash flow.

The boost in distributable cash flow in the first quarter was in large part due to a full quarter of revenue from three vessels purchased a year ago, as well as the acquisition of a 50 percent interest in two LNG carriers. CEO Peter Evensen also forecast, during the first-quarter conference call, even fatter cash flows starting in the second half of 2011, as activity in the LNG sector picks up along with opportunity for new construction and purchases. Among the former cited were floating storage and regasification units, or FSRUs, “coming up for tender.”

These Teekay should be in prime position to take advantage of. And the high quality of its customer base–mainly Super Oils and major nationally owned energy companies–anything added to asset base will flow through to cash flow and distribution growth.

As is the case with fellow tanker outfit Navios Maritime Partners LP (NYSE: NMM), Teekay typically ramps up distribution growth following major acquisitions. The last boost came with the Feb. 14 payment, when management hiked the payout 5 percent to $0.63 per unit. The completion of several major projects–as well as possible acquisitions–should create the conditions for another distribution boost later this year.

Meanwhile, the company has basically locked in an income boost for this year, which should push DCF coverage well above the first quarter’s 0.96-to-1. That figure was slightly distorted due to the timing of an equity offering to pay for the interest in the Angola LNG tankers, which diluted per unit totals before cash began to flow–it would have been about 1.05-to-1 otherwise and should rise to 1.15-to-1 or so for the full year.

Now cheaper than it’s been all year in terms of yield, Teekay LNG Partners is a solid buy all the way up to our target of 41 for those that don’t already own it.

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