Despite the pain that continues to be inflicted upon energy investors, there are some bright spots in the sector. As I wrote two weeks ago in The Energy Letter (see Refiners Beating Slump) crude oil refiners are trouncing the broader markets. And while the Alerian MLP Index (AMZ) that consists primarily of large and mid-cap midstream MLPs is down over 19% year-to-date, as I write this there are 18 MLPs with double-digit gains for the year.

In fact, more MLPs continue to increase their distributions than not. Of those that have announced distributions following the conclusion of Q2 and as of Friday, 40 MLPs increased distributions over Q1, 34 kept distributions the same, and 3 lowered their payouts.

Tallgrass Energy Partners (NYSE: TEP) led the field with an 11.5% increase from the prior quarter. TEP provides natural gas transportation and storage services in the Rocky Mountain and Midwest regions of the U.S. It is the only MLP thus far to announce a double-digit increase in its distribution from the first quarter, but it is likely that as the refining MLPs announce distributions some of them will post double-digit increases as well.

The second-largest quarterly increase was by Shell Midstream Partners (NYSE: SHLX), at 8.6% over Q1. SHLX went public in November, and demand for the units was so great that the price popped 46% the first day. Despite that impressive opening, units have added another 24% since as investors bank on many dropdowns from the deep portfolio of Shell’s midstream assets.

Among the other MLPs that announced at least a 5% distribution increase from the first quarter are three connected to the refining sector that has performed so well through the oil price meltdown. Phillips 66 Partners (NYSE: PSXP), which benefits primarily from dropdowns of the midstream logistics assets of its sponsor, the refiner Phillips 66 (NYSE: PSX), announced an 8.1% distribution increase from the first quarter. PSXP took off like a rocket following its July 2013 IPO, with units providing a total return of 87.7% in the two years since. However, the huge gains all took place during the first year of the MLP’s existence, as the total return for the past 12 months is -5.4%.

Also in 2013, Valero (NYSE: VLO) spun off Valero Energy Partners (NYSE: VLP) as the vehicle for maximizing the value of Valero’s midstream assets. Like PSXP, VLP has soared, with a total return of 63.2% in less than two years since its IPO. VLP announced a 5.4% increase in its distribution from Q1.

MPLX (NYSE: MPLX) debuted in 2012, and recently announced a 7.3% increase in its quarterly distribution. MLPX is the dropdown vehicle for the refiner Marathon Petroleum (NYSE: MPC). MPLX units have returned a total of 103.7% from its Q4 2012 IPO.

MLPs that decreased distributions from Q1 were Dorchester Minerals (NASDAQ: DMLP) and, unsurprisingly, two hydraulic fracturing sand providers — Emerge Energy Services (NYSE: EMES) and Hi-Crush Partners (NYSE: HCLP).

We believe that the MLP sector is oversold, and retains plenty of currently underappreciated value. Which MLPs will produce the best returns? We favor those that continue to increase cash flow despite the extended slump in commodity prices. Join us at MLP Profits for our latest recommendations for investors with varying risk appetites. 

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