For master limited partnerships (MLP), 2013 is both the best and worst of times.

On the plus side are record-low borrowing costs that have endured now for the better part of four years.

MLPs are also among the very few sectors that have been able to raise equity in a way that’s accretive to profits immediately. And with North American oil production on track to double in a decade, there’s no shortage of opportunities to lock in robust long-term cash flows from stable sources.

This, in turn, ensures strong distribution growth, which is the fuel for consistent unit price appreciation.

On the negative side is an extremely uncertain US government fiscal policy that could pull the rug out from under the economy in 2013, just when growth seemed to finally be picking up. The potential for turmoil has already pulled down energy prices from early autumn highs.

This has cast a pall over drilling activity, even for oil.

To date we haven’t seen many major energy midstream projects cancelled. The exception was the late November tabling of ONEOK Partners LP’s (NYSE: OKS) Bakken Express crude oil pipeline due to a lack of producers willing to sign long-term contracts.

But a further weakening of prices due to US economic turmoil would no doubt trigger at least some postponement of new deals.

To be sure, that won’t impact current cash flows and distributions of strong MLPs. Those are backed by contracts already in place for assets that are currently operating. And the payers are major energy companies, some of the most solid counterparties in the world.

But a slowdown in new deals would stall cash flow and distribution growth. And that could cause prices for many MLPs to add to losses we’ve seen since the Alerian MLP Index hit its 2012 peak in late October.

What’s an investor to do in such a volatile environment? The most important thing is to stay focused on the individual MLPs you own.

If you’re conservative and can’t stand the threat of falling energy prices causing distribution cuts, by all means you should only be holding Conservative Portfolio MLPs.

They have little or no exposure to energy-price swings. The worst that will happen from a crash in energy prices is activity will dry up and distribution growth will stall, eliminating some of the premium between their prices and those of riskier MLPs.

But distributions of all of them are solid. No worries there; and when conditions do improve, so will unit prices wipe out any red ink they suffer now.

Most investors, however, will want to stick to all of the Portfolio MLPs. That includes the few that have weakened, including Buckeye Partners LP (NYSE: BPL) in the Conservative group and several Growth and Aggressive Holdings. They have energy-price exposure. But they’re well positioned in their sectors and distributions are solid, at least unless and until far worse befalls the energy sector.

Aside from that, I see several major themes impacting MLPs in 2013.

First, a softer economy and weaker energy prices will keep a premium on financial strength and scale. Larger companies can afford to look ahead in a volatile market while weaker fare can only respond to survive.

Chevron Corp’s (NYSE: CVX) purchase of 50 percent of the Kitimat project in British Columbia, Canada, is a case in point. Kitimat is a project to construct a natural gas liquefaction facility for the purpose of exporting now land-locked Canadian natural gas, principally to Asia.

The project has been stalled up until recently, as partners EOG Resources Inc (NYSE: EOG), Encana Corp (TSX: ECA, NYSE: ECA) and Apache Corp (NYSE: APA) have been either unwilling or unable to commit funds for a project that very likely won’t start producing income until 2018.

Chevron, by contrast, can afford to pay the USD1.3 billion to buy out Encana and EOG and fork out the additional USD10 billion or so to complete the project with the cash it already has in the bank. It can look ahead of the current market weakness to what should be big-time gains ahead.

Larger producer companies like to partner with bigger energy midstream MLPs. And when they sell assets to meet regulatory requirements or to better focus operations, their first choice is larger MLPs.

The upshot is larger MLPs will see their road to growth smoothed further, while the door slams shut on new entrants or smaller MLPs.

Second, the increased advantage of larger MLPs will make sector mergers increasingly attractive. One that looks likely in the coming months is between two Portfolio Holdings, Energy Transfer Partners LP (NYSE: ETP) and Regency Energy Partners LP (NYSE: RGP).

Both share the same general partner, Energy Transfer Equity LP (NYSE: ETE), and uniting them would increase company-wide efficiency as well as reduce capital costs by simplifying ownership structure. Management has also stated this will be its ultimate objective, though it hasn’t specified when an attempt to join forces will be made or what the terms will be.

Regency is likely to be the target and so is likely to get at least some premium for units. But rather than try to decide whether Energy Transfer or Regency will get the better deal, our bet here is that the long term will bring the most benefit, as the combined entity begins raising distributions once again and captures a better valuation.

Until then Energy Transfer is a buy up to USD50 and Regency Energy is a buy up to USD29. Energy Transfer Equity is a buy on dips to USD40.

The third trend I expect is a continuation of low borrowing costs for MLPs. That’s largely the result of continued loose monetary policy from the US Federal Reserve. But it’s also because a fearful investment public will continue to demand bonds, meaning institutions will be forced to come to the table to buy.

After four years of preparing their balance sheets for another 2008, very few MLPs have significant amounts of debt coming due between now and the end of 2014, let alone 2013.

With any tightening of credit conditions they can simply hibernate until conditions do improve. And when they do they’ll be able to finance expansion cheaply once again.

Finally, I look for continued softness in prices of MLPs that derive significant chunks of profits from margin-based businesses.

Natural gas demand is surging in North America and eventually construction of liquefied natural gas (LNG) export facilities will bring prices back to more of a world level. But for now there’s such a supply glut that many producers are no longer hunting down reserves. And when prices do rise, as they did over the summer, new supply comes on the market and the glut returns, sending prices sinking once again.

Oil too is coming under pressure, despite being supported to some extent by global prices. But natural gas liquids (NGL) weakened dramatically this year. And with little way to economically hedge what are still relatively thinly traded markets, companies depending on margins for NGLs like ethane and propane suffered greatly.

Mild temperatures so far this winter bode poorly for propane. And while there’s still time for a comeback in the mercury, this looks like another potentially difficult year in the making for processors that depend on pricing margins for profit.

The biggest winners in 2012 in the MLP Profits Portfolio were all on the fee-based side. Not surprisingly, the longer the 2012-style environment pushes into 2013, the more fee-based Conservative Holdings will outperform the commodity-pegged fare in the Growth and Aggressive Holdings.

That doesn’t mean we don’t want to continue owning our recommendations. But it does mean that when Conservative Holdings get cheap, they should be investors’ first priority for purchase.

See Best Buys for my current top choices.

Portfolio Update

MLP Profits Portfolio Holdings generated an average total return–capital gain or loss plus distributions paid–of 6.9 percent in 2012. This compares to a total return of 4.4 percent for the Alerian MLP Index.

Although our collection of master limited partnerships outperformed the sector benchmark, MLPs underperformed the broad-based S&P 500 Index and the MSCI World Index, which posted total return figures of 16 percent and 16.6 percent, respectively.

During an extraordinarily fraught last day of trading for the year–a session that unfolded as members of the US Senate and emissaries from the White House were heading down to and eventually past the midnight deadline to negotiate a way off the “fiscal cliff” and thus created a pretty good microcosm of the issues that weighed on the group in 2012–MLPs rallied strongly.

Here are noteworthy developments at Portfolio Holdings since the December 2012 issue as we head into what’s likely to be another year of unconstructive federal government influence on markets.

Conservative Portfolio

Buckeye Partners LP (NYSE: BPL) reported that a Hillsborough, New Jersey, gas service line was back on line with a temporary sleeve after a Dec. 11 leak and spill that shut it down for a week. The LP will make permanent repairs during the week of Jan.7. Buckeye Partners is a buy under USD55.

Enterprise Products Partners LP (NYSE: EPD), presenting at the Wells Fargo Securities 2012 Pipeline, MLP & Energy Symposium, highlighted its diversified business model, growing fee-based cash flows, low cost of capital and significant portfolio of organic growth opportunities.

The partnership also highlighted its broad asset footprint, which reaches a majority of the producing regions in the US.

Enterprise Products has about USD7.7 billion of projects under construction, including USD1 billion of NGL pipeline projects in the Rockies and the Midwest. The MLP also has about USD1.8 billion of investments under development in the Eagle Ford Shale.

The partnership has utilized about 38 percent of its available acreage in Mont Belvieu, Texas, suggesting the potential to more than double the size of its facilities in the region.

Management also noted that 10 companies in the petrochemical industry have announced plans to increase their ethane cracking capabilities. The MLP suggested the US could potentially be short on ethane supply in the next five years if all ethylene plant newbuilds/expansions are completed.

Enterprise Products is a core holding for MLP investors of all risk tolerances who desire visible distribution growth, solid distribution coverage and exposure to a diverse set of fee-generating midstream assets. Buy under USD55.

Genesis Energy LP (NYSE: GEL) management, also presenting at the Wells Fargo conference, reiterated its goal of growing its distribution by 10 percent in 2013.

Management noted that its deepwater Gulf of Mexico fields, Mad Dog and Atlantis, have
returned to service with rig levels now above levels prevailing before the BP Plc (NYSE: BP) Macondo blowout and oil spill.

Genesis forecast that expansions if global mining capacity could lead to additional future refinery service investments in the next three to four years. The MLP expect rail to be a major part of crude logistics equation for the long term; it’s currently involved with three announced projects.

With a stable, fee-based cash flow stream and visible double-digit growth trajectory tied to organic investments in and around it asset base, Genesis Energy is a buy under USD30.

Kinder Morgan Energy Partners LP (NYSE: KMP) priced a secondary offering of 3.9 million units at USD78.60 per.

Spectra Energy Corp (NYSE: SE) is buying Kinder Morgan Energy’s one-third stake in the Express-Platte Pipeline System for about USD380 million in cash. Kinder Morgan’s joint venture partners in Canada–the Ontario Teachers’ Pension Plan Board and Borealis Infrastructure, the infrastructure investment arm of the OMERS pension plan–are also selling their interests in the pipeline system.

Spectra Energy is paying USD1.25 billion in cash and taking on USD240 million of debt to fund the transaction.

For 2013 the Kinder Morgan is targeting a distribution of USD5.28 per unit, supported by total segment earnings of more than USD5.4 billion.

The company also expects to generate excess cash flow of at least USD30 million. Kinder Morgan’s 2013 growth forecast is USD2.8 billion, which excludes dropdowns.

Parent Kinder Morgan Inc (NYSE: KMI) expects to drop down its remaining 50 percent interest in the El Paso Natural Gas pipeline system and 50 percent of its midstream assets to the MLP during the year. Kinder Morgan Energy Partners is a buy under USD86.

Magellan Midstream Partners LP (NYSE: MMP), which generates 85 percent of its cash flow from fees, is targeting distribution growth of 10 percent for 2013.

Magellan’s and Occidental Petroleum Corp’s (NYSE: OXY) BridgeTex Pipeline, a 50-50 joint venture, is scheduled to be placed into service by mid-2014 and is expected to generate a return of eight times earnings before interest, taxation, depreciation and amortization (EBITDA) based on currently committed volume. The pipeline’s cost for Magellan is estimated at USD600 million.

The Crane-to-Houston pipeline reversal’s 225,000 barrels per day capacity is fully committed and scheduled to begin initial service by early 2013, with full service by mid-2013. The USD375 million project is expected to generate a return of three times EBITDA.

Although Magellan currently generates only 10 percent of operating income from crude oil assets, approximately 85 percent of 2012-to-2014 organic growth capital and 80 percent of USD500 million of potential expansion projects are crude oil-related.

Growth Portfolio

DCP Midstream Partners LP (NYSE: DPM) reiterated its intent to increase its distribution by 6 percent to 10 percent in 2013 and 2014. Growth is supported by USD3 billion of capital expenditures earmarked for 2012 through 2014.

Spectra Energy Corp, along with ConocoPhillips (NYSE: COP) a 50-50 joint venture in DCP, noted at the Wells Fargo Conference that the Sand Hills and Southern Hills NGL pipeline projects are progressing on time and should provide significant takeaway capacity from the Permian Basin, the Mid-Continent and Eagle Ford Shale. Spectra management reiterated its intent to drop-down a one-third interest in the pipelines to the MLP. DCP Midstream Partners is a buy under USD40.

Energy Transfer Partners LP’s (NYSE: ETP) Fayetteville Express Pipeline is back to full capacity after ice-storm induced problems at the Russell Compression Station in Seminole, Texas. Fayetteville Express is a joint venture between Energy Transfer and Kinder Morgan Energy Partners.

Energy Transfer sold Missouri and New England gas distribution assets to The Laclede Group (NYSE: LG) for USD1.035 billion in cash and assumed debt. Missouri Gas Energy has 500,000-plus customers, New England Gas Company 50,000-plus. Both are units of Southern Union Group, which is controlled by Energy Transfer Partners and its general partner Energy Transfer Equity LP (NYSE: ETE).

Energy Transfer and fellow MLP Profits Growth Portfolio Holding Regency Energy Partners LP (NYSE: RGP) announced that the Lone Star West Texas Gateway NGL Pipeline went into service in early December, ahead of its planned first-quarter 2013 completion date. The 570-mile, 16-inch pipeline, owned by Lone Star NGL LLC, a joint venture between the two partnerships, transports NGLs produced in the Permian and Delaware Basins in West Texas to Mont Belvieu, Texas.

The pipeline, which extends from Winkler County in West Texas to Energy Transfer’s processing plant in Jackson County, Texas, has an initial capacity of approximately 209,000 barrels per day with the potential to increase capacity.

Energy Transfer also announced that its 130-mile Justice NGL Pipeline, extending from the Jackson County processing facility to Mont Belvieu, is also in service. Lone Star has secured capacity on the pipeline for ultimate delivery of NGLs to its storage and fractionation facilities at Mont Belvieu.

Lone Star’s previously announced Fractionator I is scheduled to be completed this year, with Fractionator II set to go in the fourth quarter of 2013.

Energy Transfer Partners is a buy under USD50.

Inergy Midstream LP (NYSE: NRGM) completed the previously announced acquisition of Rangeland Energy LLC, the owner and operator of the COLT crude oil rail terminal, storage, and pipeline facilities, for approximately USD425 million.

The COLT Hub expands Inergy Midstream’s shale-focused infrastructure portfolio and is a natural extension of Inergy’s refinery and producer-services businesses.

Inergy Midstream also announced the completion of the long-term debt and equity financing associated with the COLT Hub acquisition with the private placement of USD225 million of common units and USD500 million in senior unsecured notes due 2020 with a coupon of 6 percent. The medium-term note offering was up-sized from a planned USD400 million.

The remaining net proceeds from these offerings were used to repay borrowings under the MLP’s revolving credit facility. Inergy Midstream is a hold.

Targa Resources Partners LP (NYSE: NGLS) added USD200 million to the USD400 million private placement of 5.25 percent notes due May 2023 that it announced in October.

The placement closed in mid-December. The in-demand notes were priced at 101 percent of the principal amount to yield 5.093 percent.

Management will use proceeds from the placement for general purposes, which could include meeting working capital requirements as well as funding acquisitions.

Targa Resources is a buy under USD39.

Teekay LNG Partners LP (NYSE: TGP) ordered two 173,400 cubic meter LNG carrier newbuilds, with options for three more with Korea’s Daewoo Shipbuilding & Marine Engineering (Korea: 042660, OTC: DWOTF).

Teekay will take delivery of the ships in the first half of 2016, by which time it hopes to have long-term contracts for their service in place. This could benefit the MLP substantially, given the significant ramp-up of global gas liquefaction capacity over the next four years.

The ships will be built with the significantly more fuel efficient (compared to the previous state of the art) M-type, Electronically Controlled, Gas Injection (MEGI) twin engines. Fuel-efficient ships typically command premium rates on the order of 30 percent.

Teekay will make a minimal down payment on the ships, funded from existing liquidity, with the balance due on delivery. The newbuilds are set to be among the largest LNG carriers to be able to transit the expanded Panama Canal, which make them strong candidates to carry US Gulf of Mexico-to-Asia exports.

Teekay also announced the creation of a 50-50 joint venture with EXMAR NV (Belgium: EXM, OTC: EXMRF) to operate in the liquefied petroleum gas carrier (LPG) space. Exmar has extensive experience as an LPG carrier, operating with about 70 percent charter coverage, which it expects to continue with the new JV.

The JV, EXMAR LPG BVA, will include 23 vessels. Teekay LNG is contributing USD140 million in equity and assumed prorated debt and lease obligations for a 50 percent stake in the JV.

Proceeds from the MLP’s September equity raise, when it sold 4.6 million units at USD38.73 per, will be used to fund the deal.

EXMAR LPG has already received a commitment from commercial lenders to refinance the fleet in early 2013 and is already discussions at various shipyards to grow its fleet via additional orders.

Although anticipated 30 percent exposure to the spot LPG tanker market adds some uncertainty to the deal from a cash flow perspective, it’s likely that the JV will give a boost to Teekay LNG’s distributions. Teekay LNG Partners is a buy under USD41.

Aggressive Portfolio

PVR Partners LP (NYSE: PVR), presenting at the Wells Fargo conference, highlighted its ongoing transition from a predominantly coal royalty business to a midstream MLP. Management reaffirmed its expectation that 75 percent to 80 percent of EBITDA will be generated by midstream operations and approximately 80 percent of revenue will be fee-based by the end of 2013.

PVR is moving about 1 billion cubic feet of gas per day on its pipelines, up from zero in 2010.