The vicious selloff in the broader market since the beginning of October has spared few sectors and industries. The energy sector is no exception: The S&P 500 Energy Index is off more than 31 percent since the beginning of October against a 27 percent decline in the S&P 500.

But the most vicious selloffs also present the most attractive opportunities for investors. And income-oriented investors are currently facing the best buying opportunity of the past two decades, a chance to lock in double-digit or near double-digit yields from firms with conservative management teams and a long history of boosting distributions.   

Consider that the current yield on a 10-year US government bond is less than 3.7 percent. But some of my favorite energy-levered Master Limited Partnerships (MLPs) are yielding more than 4 times that. Better still, many MLPs have minimal exposure to falling commodity prices and have seen little deterioration in fundamentals over the past year. For newer subscribers unfamiliar with the group, I offer a detailed look at MLPs in the Nov. 22, 2006, issue of TES, Leading Income.

If you doubt the fundamentals, consider this simple fact: Every single one of the MLPs I recommend has boosted distributions paid to investors at least once over the past 12 months, and several have already declared increases in their payout for this quarter. Despite that fact, every one has equivalent or better distribution coverage than was the case one year ago. That’s hardly the sign of a sector in fundamental distress.

There’s no denying that most MLPs are still trading well off their July 2007 highs. The Alerian index has only slightly outperformed the S&P 500, falling 33 percent since its July 13, 2007, highs compared to a 42 percent drop for the S&P over the same time period. However, I believe the main reason for the slide in MLPs has to do with artificial selling pressure from cash-strapped funds rather than deteriorating fundamentals. The dramatic recovery in the group off its October lows suggests that selling pressure is beginning to abate. 

And the group has been largely spared the carnage of the past few weeks: The Alerian MLP Index, the industry benchmark for the group, is off less than 7 percent since the beginning of the month and has rebounded close to 30 percent from its lows Oct. 10. I believe this is an early sign that the group is regaining its traditionally defensive characteristics. Here’s a brief rundown of the factors that lead me to believe this is a great buying opportunity for many MLPs:

Distribution Boosts–There are currently 50 MLPs in the Alerian MLP Index. Of that total, 48 have announced an increase in their distributions at some point over the past 12 months. That’s 96 percent of the total.

To date, a total of 36 of the 50 MLPs in the Alerian Index have officially announced dividends for the third quarter. Of those, 75 percent have announced an increase in their quarterly payout.

Valuations–The Alerian MLP index currently yields 9.1 percent compared to 3.69 percent for the 10-year US government bond. That’s a spread of 541 basis points (5.41 percent). This is near the record wide levels of about 700 basis points recorded earlier this month. In other words, MLPs are offering close to record-high yields relative to US Treasuries right now.

Low Exposure to Commodity Prices–Most MLPs are involved in businesses such as owning pipelines, storage facilities and gas processing plants. Such assets typically generate cash flows based on volumes of natural gas or oil rather than the value of that oil or gas. In addition, many pipeline operators charge a fixed fee to shippers to lease capacity on their lines. This fee doesn’t vary with commodity prices or volumes transported. It really doesn’t matter much if oil is at $180 a barrel or $60 a barrel to many in the group.

An exception is upstream MLPs such as Linn Energy (NSDQ: LINE) that do see their cash flows vary with the price of oil and gas. However, most of these firms have hedged most or all of their production over the next two to four years. They’ve essentially locked in favorable prices regardless of the path of oil and gas prices.

Fund-Related Selling–Much of the decline in MLP prices over the past year can be attributed to distressed fund selling. Some MLPs, such as Linn  Energy, used private equity placements to fund acquisitions. When the credit markets began to deteriorate last year, many firms that bought into private placements were forced to raise cash; these companies sold because they had to, not because they wanted to.

The latest wave of selling appears to have come from closed-end MLP funds such as those managed by Tortoise Capital Advisors and Kayne Anderson Capital Advisors. These funds have leverage restrictions meaning that they can only carry so much debt relative to the value of their portfolios. As MLPs sold off over the past month and a half, these funds were forced to sell off part of their portfolios to raise cash and meet their leverage restrictions.

A perfect example of this is Enterprise Products Partners (NYSE: EPD). On Oct. 8, the stock dropped all the way to $16 intraday before rebounding to close at $19.88. The reason for the selloff was a series of large sell orders right at the open that swamped demand for the stock and led to a sharp drop lower. Although there’s no way to know for certain, the rumor is that this seller was one of the closed end funds.

Value Investors Stepping Up–In recent weeks, sharp drops in some of the big MLPs have attracted buying interest amid heavy volume. This is a sign that some more value-oriented buyers are taking advantage of the ridiculously low valuations caused by distressed institutional sellers.

A perfect example of this is Enterprise Products Partners. As noted above, a large trade at the open Oct. 8 pushed the stock down to $16. But Enterprise rallied to close at $19.88, and that move came on near-record volume of more than 6 million shares.

Normalization of Credit Markets–Although global stock markets continue to trade at or near their October lows, the credit markets are showing signs of thawing.

I explained the TED spread at some length in the Oct. 1, 2008, issue of TES, Energy Stocks Watch Washington. To make a long story short, the higher the TED spread, the tighter the credit markets. That spread has declined from more than 480 basis points earlier this month to well under 300. Although this is still an elevated reading, the decline in the TED spread is sharp and represents a positive development.

Since one of the issues facing the MLP sector has been fears over access to credit, this is a particular positive for the group.

I currently have 10 buy-rated MLPs in the TES Portfolios: Duncan Energy Partners (NYSE: EPD), Enterprise Products Partners (NYSE: EPD), Natural Resource Partners (NYSE: NRP), Penn Virginia Resources (NYSE: PVR), Teekay LNG Partners (NYSE: TGP), Eagle Rock Energy Partners (NSDQ: EROC), Hiland Holdings GP (NSDQ: HPGP), Linn Energy (NSDQ: LINE), Sunoco Logistics Partners (NYSE: SXL) and Williams Partners LP (NYSE: WPZ). I also recommend closed-end MLP Tortoise Energy Infrastructure Fund (NYSE: TYG).

In the next issue of TES, scheduled for Nov. 5, I’ll offer a more detailed look at each of these firms and the prospects for the group as a whole. As always, my focus when evaluating income-oriented stocks is dividend sustainability; if dividends are sustainable or have scope to grow, dips in the stock represent buying opportunities for investors seeking to generate steady yield income.

And more broadly, in uncertain market environments such as the current time, investors inevitably gravitate toward high-income investments, boding well for the group.