The fourth quarter of 2011 was a good time to own MLP Profits recommendations as well as master limited partnerships in general.

The Alerian MLP Index touched an intra-day low of barely 316 on Oct. 4, 2011, and proceeded to rally hard, closing the year at nearly 390.  Fourth-quarter returns for the index were nearly 20 percent.

MLPs benefitted from a market-wide rally last year in pretty much everything this side of US Treasury bonds, as it became clear that a US government debt downgrade wouldn’t run the world economy off a cliff. But the sector also had a solid fourth quarter in calendar 2009 and 2010, as did most dividend-paying stocks.

Looking further back, MLPs also tore up the track in the fourth quarter of 2006, with the Alerian MLP Index soaring from barely 250 to over 280 by the end of the year. They scored upper-single-digit returns in 2007. And even in 2008, when almost nothing in the equity markets held its ground, MLPs were among the first sectors to recover, staging a 15 percent-plus rally from a late November bottom through the end of that troubled year.

MLPs have also been outperformers for the whole period since stocks bottomed in early 2009. Fourth quarters, however, have been special for a couple of reasons, mainly MLPs’ superior yields and the reliability of their cash flows.

For the large institutions that dominate global trading, the end of the calendar year means one of two things. If a manager or team has been particularly successful, they’ll look to lock in or at least safeguard some of those returns by moving to higher percentage areas of the market. MLPs’ generous and rising yields guarantee they’ll be making something even if the overall market is flat, so they definitely fit the bill.

If the year has been less than stellar for a manager and his or her team, they may try to place some big bets to get back on track. Even if they do that, however, they’re also likely to focus on safety and yield to some extent to improve the overall quality of their portfolios, and MLPs are again an ideal vehicle.

All that is essentially moot for individual investors like us. Come Jan. 7, we won’t care what our portfolios looked like Dec. 31. We just want our picks to be worth more as businesses, so they can ramp up their distributions to us.

For institutional money managers, however, beating benchmarks and set dates are the game. And with MLPs increasingly owned by institutions, we can expect near-term trading to reflect their needs.

So what does that mean for us as we enter the fourth quarter of 2012?

First, barring major surprises in the third-quarter results due out over the next five to six weeks we can expect more buying of MLPs by institutions, and very likely higher prices. That means we need to be careful with prices paid for any new purchases of MLPs we make going forward, to ensure we don’t overpay.

Second, it’s likely the MLPs with the most institutional ownership will be more volatile than those with less institutional ownership. Again, that’s assuming there are no significant events at underlying businesses to change value.

Here’s how the MLP Profits Portfolio Holdings currently stack up on that score.

• Buckeye Partners LP (NYSE: BPL)–53.5%
• DCP Midstream Partners LP (NYSE: DPM)–52.6%
• Eagle Rock Energy Partners LP (NSDQ: EROC)–83.7%
• El Paso Pipeline Partners LP (NYSE: EPB)–37.5%
• Energy Transfer Partners LP (NYSE: ETP)–23.2%
• Enterprise Products Partners LP (NYSE: EPD)–61.3%
• Genesis Energy LP (NYSE: GEL)–44.6%
• Inergy Midstream LP (NYSE: NRGM)–23.0%
• Kinder Morgan Energy Partners LP (NYSE: KMP)–22.2%
• Legacy Reserves LP (NSDQ: LGCY)–25.0%
• Linn Energy LLC (NSDQ: LINE)–26.2%
• Magellan Midstream Partners LP (NYSE: MMP)–57.1%
• Mid-Con Energy Partners LP (NSDQ: MCEP)–11.9%
• Navios Maritime Partners LP (NYSE: NMM)–36.3%
• Oiltanking Partners LP (NSDQ: OILT)–101%
• Regency Energy Partners LP (NYSE: RGP)–56.4%
• Spectra Energy Partners LP (NYSE: SEP)–30.0%
• Sunoco Logistics Partners LP (NYSE: SXL)–45.7%
• Targa Resources Partners LP (NYSE: NGLS)–54.9%
• Teekay LNG Partners LP (NYSE: TGP)–35.3%
• Vanguard Natural Resources LLC (NYSE: VNR)–16.9%

Note these figures don’t include the percentage of common units held by general partners (GP). GPs’ managing partner interest garners them incentive distribution rights (IDR). But most also hold a sizeable percentage of common units as well, entitling them to distributions.

El Paso Pipeline Partners LP’s (NYSE: EPB) tally doesn’t include the 42 percent owned by its GP, Kinder Morgan Inc (NYSE: KMI). Equally, Energy Transfer Partners LP’s (NYSE: ETP) figure doesn’t include the 21.4 percent owned by its GP, Energy Transfer Equity LP (NYSE: ETE). Inergy Midstream LP’s (NSDQ: NRGM) doesn’t include the 74.4 percent owned by Inergy LP (NSDQ: NRGY).

In addition, Kinder Morgan Energy Partners LP (NYSE: KMP) is 6 percent owned by general partner Kinder Morgan Inc. Regency Energy Partners LP (NYSE: RGP) is 15.4 percent owned by Energy Transfer Equity, Spectra Energy Partners LP (NYSE: SEP) is 63 percent held by general partner Spectra Energy Corp (NYSE: SE), Sunoco Logistics Partners LP (NYSE: SXL) is soon to be 36.3 percent owned by Energy Transfer Partners, and Teekay LNG Partners LP (NYSE: TGP) is 36.3 percent owned by Teekay Corp (NYSE: TK).

Note that this list includes a new entry, Oil Tanking Partners LP (NSDQ: OILT). The company is the subject of a Sector Spotlight on oil and gas storage this month, and I’ll be adding to the Conservative Holdings on any dip to USD35 or lower. The LP is 40 percent owned by its general partner Oiltanking Holding Americas Inc.

All else equal, a large general partner interest in the common units will stabilize an MLP’s price. It’s a vote of confidence in the business plan and distribution growth track of the LP, just as insider buying is, as it conjoins the interests of the GP and the limited partners. And it’s a good sign that the parent will be dropping down assets to the LP, providing the fuel for further distribution increases.

On the other side of the equation are the IDRs, which range from partnership to partnership. My view is the lower the fees paid to the general partner the better, but with two caveats.

First, you get what you pay for in management. And while it may be irksome to see the GP getting a bigger piece of the pie than others do, the only really important thing for us investors is the bottom line. If the LP is producing big yields and distribution growth, it’s likely worth shelling out an above-average fee to management.

Second, MLPs with higher IDRs often trade at discounts to that are well out of proportion to the additional fees. Enterprise Products Partners LP (NYSE: EPD), Kinder Morgan Energy Partners and Magellan Midstream Partners LP (NYSE: MMP), for example, are arguably of equally high quality. Enterprise Products and Magellan Midstream arguably give more back to limited partners because they have no GPs or IDRs, while Kinder Morgan Energy Partners is frequently cited by sector critics for having above-average IDRs.

On the other hand, Magellan Midstream yields just 4.3 percent and Enterprise Products yields 4.9 percent, while Kinder Morgan Energy Partners pays out 6 percent. And the latter’s annual dividend growth rate of 7 percent is actually considerably faster than Enterprise Products’ 5 percent.

The upshot is IDRs are just one consideration when it comes to picking MLPs for your portfolio. And they’re far less important than the support a good GP can provide for an MLP’s long-run cash flow and distribution growth.

What happens if there’s an overall market correction? Odds are MLPs with more institutional ownership and less general partner involvement will see their prices most affected.

Stock market selloffs come with the territory, no matter what you’re invested in. And as investors interested in yield, it’s equally inevitable that we’re going to be holding MLPs when such negative events occur.

The key, however, isn’t to change your investment strategy to avoid every downturn. It’s making sure what you own will recover its value when conditions inevitably improve. And as we saw in March 2009, they always do, no matter how bad things may get at times.

That means staying focused on the health of underlying businesses. So long as what we own is strong inside and ready to keep growing distributions, we’re going to hold on, no matter how choppy conditions get. Conversely, if a company’s fortunes fade we’ll be out and onto something else.

A Look at Earnings

The third quarter of 2012 was marked by a recovery in energy prices from the lows made in May and June. The extent to which that helps any energy producers will depend on the structure of price hedges. And exposure to natural gas liquids prices and “frac” spreads is something of a wild card, as these markets are much smaller and more difficult to hedge.

By and large, however, the resilience of energy prices should prove to be a major plus for the maintaining the pace of new energy midstream projects, particularly in oil. Meanwhile, MLPs continued to enjoy a very low cost of capital, for both equity and debt.

Predictably, new equity issues during the quarter routinely triggered short-lived selloffs for MLPs. Enterprise Products’ USD473 million offering in late September didn’t do too much damage, sending the unit price down from USD54 and change to USD53 and change. Other MLPs took more dramatic hits when they went to market, however, including Energy Transfer Partners.

Our view is that selling in the wake of equity issues is usually a good time to buy an MLP, as raised funds are almost always invested in accretive enterprises. But investors should continue to expect this kind of action when companies come to market.

As for debt capital, Enterprise Products’ debt maturing in January 2068 currently trades at a yield to maturity of less than 4.5 percent. That’s emblematic of a market that’s appears still ready, willing and able to accept any and all debt that’s backed by energy midstream assets.

Low cost of capital means even very conservative and therefore lower margin projects can be highly lucrative. The most encouraging thing is that most MLP managements are still not succumbing to the temptation to relax project standards to boost revenue, or to lever up.

Rather, management is still locking in cash flows with long-term contracts and keeping balance sheets relatively clean. That’s clearly shown by the numbers in the table below, which show very little maturing debt between now and the end of 2013 for MLP Profits Portfolio Holdings.

Even MLPs with larger amounts of debt have very low obligations relative to their size. Enterprise Products, for example, has a total of USD1.2 billion in bond issues maturing in 2013. That amount, however, is equal to just 2.5 percent of the company’s market capitalization. It’s covered nearly three times over by the available credit on the company’s USD3.5 billion tranche that matures in September 2016. And it’s at coupon rates between 5.65 percent and 6.375 percent, or roughly twice the yield to maturity on Enterprise Products’ 10-year debt.

The upshot is refinancing that USD1.2 billion is going to translate into considerable savings for Enterprise Products next year. And even if credit conditions should tighten sharply, management still has more than enough wherewithal to retire those obligations and refinance them later when conditions improve.

That’s an extraordinarily nice position for a company to be in, particularly when it operates a business that held revenue steady even during 2008, when oil prices fell from well over USD150 a barrel to barely USD30.

I fully expect solid industry conditions and low financing rates to shine through with strong distribution coverage and continued growth for all MLP Profits Portfolio Holdings as third-quarter numbers come in.

We’ll have a wrapup of the vital signs next month for those that have reported by issue time, with the rest rounded up the following month. If there are developments that require a change in advice, we’ll send out a Flash Alert as we always have.

As the table shows, several Portfolio Holdings did post distributable cash flow (DCF) in the second quarter that lagged their current payouts, namely Buckeye Partners LP (NYSE: BPL), Kinder Morgan Energy Partners, Legacy Reserves LP (NSDQ: LGCY), Linn Energy LLC (NSDQ: LINE), PVR Partners LP (NYSE: PVR), Regency Energy Partners LP (NYSE: RGP) and Vanguard Natural Resources LLC (NYSE: VNR).

MLPs over time must generate enough DCF to at least cover their distributions. One quarter of inadequate coverage is excusable, provided management has laid out a clear course for improved coverage going forward. And that was the case for all of these MLPs last quarter.

Buckeye, for example, was heavily impacted by the weather and its impact on throughput of petroleum products.

Kinder Morgan Energy Partners’ distribution increases are well funded by energy midstream projects that began generating revenue in the second quarter and will ramp up a lot further in the third. The same is true for Regency and PVR, which was hit by lower royalties from coal produced on its lands.

Legacy, Linn and Vanguard, meanwhile, were nicked by the volatility in natural gas liquids prices in the first half of 2012, markets which are much more difficult to hedge than oil and natural gas. But all have new production coming on line that should more than close any revenue gap in the second half of the year.

The key for all of these MLPs, of course, is putting up numbers that indicate management’s guidance for recovery is still on track. Preferably, that will mean DCF coverage of better than 1-to-1 in the third quarter and the promise of further gains ahead.

But the key will be the assumptions behind maintaining and increasing the current distribution rate going forward, and whether or now any have changed.

If they’re on track, we’ll be keeping these MLPs in the Portfolio. If, on the other hand, there are signs of faltering in the numbers we’ll be out and on to something else. One great thing about having such a large coverage universe as in How They Rate is there are always alternatives.

Here’s when to expect the numbers this time around.

• Buckeye Partners LP (NYSE: BPL)–Nov. 5 (expected)
• DCP Midstream Partners LP (NYSE: DPM)–Nov. 7 (expected)
• Eagle Rock Energy Partners LP (NSDQ: EROC)–Nov. 5 (expected)
• El Paso Pipeline Partners LP (NYSE: EPB)–Nov. 2 (expected)
• Energy Transfer Partners LP (NYSE: ETP)–Nov. 2 (expected)
• Enterprise Products Partners LP (NYSE: EPD)–Nov. 2 (expected)
• Genesis Energy LP (NYSE: GEL)–Nov. 8 (expected)
• Inergy Midstream LP (NYSE: NRGM)–Nov. 15 (expected)
• Kinder Morgan Energy Partners LP (NYSE: KMP)–Oct. 19 (expected)
• Legacy Reserves LP (NSDQ: LGCY)–Nov. 2 (expected)
• Linn Energy LLC (NSDQ: LINE)–Oct. 26 (expected)
• Magellan Midstream Partners LP (NYSE: MMP)–Nov. 5 (expected)
• Mid-Con Energy Partners LP (NSDQ: MCEP)–Nov. 7 (expected)
• Navios Maritime Partners LP (NYSE: NMM)–Oct. 24 (expected)
• Regency Energy Partners LP (NYSE: RGP)–Nov. 2 (expected)
• Spectra Energy Partners LP (NYSE: SEP)–Nov. 5 (expected)
• Sunoco Logistics Partners LP (NYSE: SXL)–Oct. 25 (expected)
• Targa Resources Partners LP (NYSE: NGLS)–Nov. 7 (expected)
• Teekay LNG Partners LP (NYSE: TGP)–Nov. 9 (expected)
• Vanguard Natural Resources LLC (NYSE: VNR)–Nov. 2 (expected)