Pipeline profits: High yields from MLPs

"MLPs have been heavily owned by institutional investors in recent years, and many were forced to sell off their portfolios piecemeal to raise cash and pay down leverage.

"This cash-motivated, fearful selling powered several selling waves in the Alerian MLP Index. This presents investors with a great opportunity to buy into a sector that's been hit mainly by cash-motivated selling pressure, not a deterioration in fundamentals.

"There's a good fundamental reason for MLPs' defensive characteristics: Most are involved in the midstream energy business which typically has little or no real exposure to commodity prices. For example, the most common assets owned by MLPs are oil and gas pipelines.

"The bottom line: The pipeline transportation business offers steady, dependable cash flows that don't change based on commodity prices. This is one of the steadiest, most cash-flow-positive businesses you'll encounter.

"Enterprise Products Partners (NYSE: EPD) is one of the largest and oldest MLPs in the US. It owns pipelines, processing facilities and production platforms in the Gulf of Mexico, among other assets.

"Enterprise has an impressive history of growing its distributions -- raising it 27 of the past 39 quarters -- and has never once cut its payout.

"The MLP has more than $2.2 billion in new construction projects due to be completed and go into service in 2009. These will be almost immediately accretive to Enterprise's cash flows, as they're backed by long-term commitments by energy industry giants.

"Right now, Enterprise has more than $1.6 billion in liquidity; the MLP has cut capital spending to the point that it won't need to access credit markets this year. But Enterprise's management team has indicated it has plenty of additional expansion projects available that it's looking to fund when credit markets improve.

"Enterprise is conservatively managed by oilman Dan Duncan; the MLP could boost its distributions at a faster pace, but has elected to slow distribution growth for now and build a cash flow cushion. That's prudent in the current market. Yielding more than 9%, EPD is a buy under 27.

"Linn Energy (NASDAQ: LINE) ) is a limited liability company, a structure very similar to the MLP form. Unlike most MLPs, Linn isn't involved in the midstream business but actually produces oil and natural gas.

"Producers obviously have exposure to commodity prices; lower oil and gas prices spell lower revenues. The catch is that Linn has hedged substantially all of its production out to 2012.

"That means regardless of what happens to commodity prices, Linn has locked in prices above $8 per MMBtu for gas and $90 a barrel for oil. Yielding around 15%, Linn Energy is a buy under 20.

"I would caution that holding MLPs and LLCs in a tax-advantaged account causes myriad tax issues and therefore is not recommended.

"One way around this problem is Tortoise Energy Infrastructure Fund (NYSE: TYG), a closed-end fund that focuses on the MLP industry.

"This fund is appropriate for tax-advantaged accounts, and is also convenient for investors who want to buy into the MLP story without handling K-1 partnership forms at tax time. I'm boosting my rating on Tortoise Energy Infrastructure Fund to a buy under 27."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.