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Master Limited Partnerships offer amazing distributions to shareholders, and very stable business models. Because of stringent tax provisions on MLPs, energy MLPs are mostly divided into upstream, and midstream categories. Upstream refers to companies that explore, drill, and develop reserves. This business can be very risky, but most utilize hedges to maintain clarity and reliability on free cash flows to preserve their high payouts.

While upstream energy can be lucrative, the most popular MLPs are midstream, or pipeline businesses. These entities create stable income from the transportation of natural gas liquids (NGLs), oil, natural gas, fuel and other natural resources. Midstream MLPs maintain important energy infrastructure in the U.S., including pipelines, storage and transport terminals. They are integral to basic energy infrastructure, therefore provide fairly stable business models, which have consistently performed for investors.

Aside from share price appreciation, which MLPs have a history of the consistent distribution increases? Of course raw gains in share price fabulous, but I find most gains in MLP share price is lead by the promise or realization of distribution increases. Therefore, let's investigate the current status of some prominent leaders in the midstream and upstream MLP energy space that have solid histories of growing their distributions.

Upstream:

For upstream, we will look at Breitburn Energy (NASDAQ:BBEP), QR Energy (NYSE:QRE), Vanguard Natural Resources (NASDAQ:VNR), and Line Energy (NASDAQ:LINE):

MLP

YieldQuarterly Distribution Compound Growth RateAvg. Production Hedged 2013, 2014
Since Q1 2010YTD '12OilGas
BBEP9.33%2.3%1.11%76.5%71.5%
QRE9.47%*2.82%1.31%100%78.5%
VNR8.24%1.84%1.06%80%93%

LINE

7.15%1.41%2.5%100%100%

(*QRE IPO: Dec 2010)

Out of these 4 MLPs, LINE and QRE have the most significant hedging programs over the next two years. However, VNR appeared to have the best combination of yield, history of increasing distributions, and hedges. Also, this company pays distributions monthly, and pays no IDRs to a GP, which offer a distinct advantage to investors by comparison.

For more details on QRE's outstanding hedge program, click here

For more details on BBEP's distribution growth, click here

Midstream

Most midstream companies have limited hedges since they generally do not buy and sell the commodity itself. Usually, these companies have long-term contracts with refineries and upstreamers and simply transport the fuel through pipelines and terminal facilities. Some refer to them as "toll way" pipeline operators, which refers to their fee-based models, which are generally based on volume transported, and not so much on the price of the commodity itself. Simply put, the more energy that's transported, the more these companies earn, generally speaking. Let's examine several leaders in the industry: Enterprise Products Partners (NYSE:EPD), Kinder Morgan Energy Partners (NYSE:KMP), and Energy Transfer Partners (NYSE:ETP), and two small but up and coming companies: Magellan Midstream Partners (NYSE:MMP) and Martin Midstream Partners (NASDAQ:MMLP).

MLPYieldQuarterly Distribution Compound Growth Rate
Since Q1 2010YTD '12

EPD

4.84%1.36%1.59%
KMP5.83%1.59%2.97%
ETP8.39%0%0%
MMP4.28%3.04%12.25%
MMLP8.65%0%.17%

Out of these 5 companies, it seems MMP has been on a tear lately. Boasting 12.25% compound quarterly distribution growth YTD and over 3% since Q1 2010, it seems like this company is very healthy. As of December 2011, MMP's portfolio consisted of a 9,600-mile refined petroleum pipeline network, which had access to about 40% of the country's refining capacity and imports. Also, it had petroleum product storage capacity of 80 million barrels, and an 1,100-mile ammonia pipeline system. The petroleum pipeline system accounted for 77.3% of operating margin in 2011; petroleum terminals for 21.7%; and the ammonia pipeline system for 1.0%. The overwhelming concentration in petroleum-based systems and about zero to natural gas has probably assisted to MMP's outstanding performance-as oil has been very strong by comparison in recent years.

Summary

Of the upstreamers briefly examined here, it seems VNR has the strongest distribution growth over the past two years. In addition to this strength, it is important to note the company has recently switched its distribution schedule to monthly, rather than quarterly. This offers better compounding interest, an important positive for VNR. This exercise initiated a new found respect for VNR, and I will examine this company in more depth soon, so stay tuned.

For the midstreamers, it seems MMP has been very solid, probably due to its broad exposure to oil refineries and concentration to petroleum, with little to natural gas. Also, its small market cap of $10B is a strong point, as the company is more nimble and still in a growth stage compared with the larger and safer EPD, KMP and ETP. Upon more research, I found that MMP's recent Q2 distribution is 20.4% higher than 2011's Q2. MMP's impressive distribution increases and petroleum exposure definitely heightens my interest in this company, and probably warrants additional research.

In full disclosure, I have owned EPD for years and currently own Kinder Morgan Inc (NYSE:KMI), which is the parent company to KMP. KMP has grown distributions at an attractive rate, but I feel future increases may be pressured by KMI, since KMI owns IDRs, or incentive distribution rights in KMP. KMP is a great entity and the dividend is impressive, but if you are looking for long-term distribution growth, KMI will probably do so at a faster rate that KMP down the road. If you are looking for my opinion, KMI is the long-term Kinder entity to own, and KMP is the entity to harness for the short term. In contrast to this situation, EPD has no general partner (GP), so EPD is free from IDRs to a GP. This could be a weakness, as there is no hope for drop downs or support from the GP. But in my view, this is unrestrictive to distribution growth and is why I have owned EPD since 2010 and will continue to do so.

Source: Which MLPs Have The Most Distribution Growth?

Additional disclosure: I have owned QRE in the past 30 days. I may initiate a long position in VNR over the next 72 hours.