Energy stocks in general have been performing well over the past few months. But performance has been more uneven than in the past–there are clear leaders and clear laggards in this run-up.

In short, the market is becoming more selective.

Nowhere is this more evident than in the coal group. Coal is one of my favorite sectors right now; low cost coal-fired power is attracting plenty of attention with natural gas hovering around $15 per million Btus. And we’re also seeing plenty of talk about new coal technologies–advanced ultra-clean coal plants, coal gasification and liquefaction projects.

Against this positive backdrop, some coal-mining and related stocks are breaking out to new multi-year highs while others are breaking down to new lows. To make money, you’ll have to be selective and avoid the losers.

In this issue I examine the coal mining industry in greater depth and sort out the winners and losers of the coal bull market. I’ll also take a look at another back-door coal play, the regional railroads.

I’m recommending the following stocks:

· Peabody Coal (NYSE: BTU)
· Arch Coal (NYSE: ACI)
· Burlington Northern Santa Fe (NYSE: BNI)
· Genesee & Wyoming (NYSE: GWR)
· Penn-Virginia Partners (NYSE: PVR)
· Natural Resource Partners (NYSE: NRP)

Avoid or sell the following stocks:

· Consol Energy (NYSE: CNX)
· Massey Energy (NYSE: MEE)
· Alpha Natural Resources (NYSE: ANR)

Be Selective

In the August 31 TES, King Coal, I outlined my bullish case for coal. The simple fact is that coal still accounts for more than 50 percent of the electricity produced in the US and will actually grow in importance between now and 2025. The reasons are simple: Coal is plentiful and it’s far cheaper to produce power from coal than from natural gas, even if gas were to decline by 70 percent from current levels.

There’s also a bullish short-term case to be made. Inventories of coal at the nation’s utilities are the lowest they’ve been in decades. I gave a detailed rundown of this in a December 9 Flash Alert, Airlines, Coal And Tankers.

To summarize, we now have confirmation from several coal companies that some of their customers are running on 15 days’ or less worth of coal supply–this compares to a more normal and comfortable inventory level of 35 to 40 days’ supply. And according to Peabody Energy, some customers were running on as little as five days’ coal supply as recently as early November. The utilities are likely not at all happy to be holding such low stocks just as we enter the coldest months of the year; I expect them to be re-stocking inventories well into 2006. This suggests strong coal demand in the short run.

But just because the fundamentals are bullish for coal does not mean you can buy any coal mining company and make money. There has been a marked divergence in performance in the industry of late between the leading stocks such as Arch Coal and Peabody Energy and the laggards, such as Massey Energy and Alpha Natural Resources. Check out the stock charts of Peabody Coal and Alpha Natural Resources below for a closer look.


Peabody Energy



Source: www.stockcharts.com


Alpha Natural Resources



Source: www.stockcharts.com


You don’t have to be a devotee of technical analysis to see that Alpha recently broke to a new all-time low while Peabody is hovering near an all-time high. My intent is not to pick on Alpha, as Massey Energy and Consol Energy are also sitting well off their September/October highs. All coal stocks rallied in tandem during the summer because it was a raging bull market for all energy stocks. It’s clear the market is now getting more selective.

There’s a very good reason for this divergence. The problem lies in the location of the miners’ reserves of coal; let’s look at Alpha Natural Resources for illustrative purposes. Alpha is a Virginia-based company with roughly 500 million tons of reserves mainly in Virginia, West Virginia, Pennsylvania and Kentucky. This is the heart of the Central Appalachia coal region.

There’s absolutely nothing wrong with the coal produced from Central Appalachia; in fact, the region contains some of the highest quality coal reserves in the world. Central Appalachia coal has what’s known as a high heat content or Btu content. Btu is the abbreviation for “British thermal unit” and it’s a measure of the heat required to heat a pound of water by 1 degree Fahrenheit. Obviously, coal with a high Btu content is great for use in power plants as it produces more energy per short ton of coal burned. Much Central Appalachian coal contains over 12,500 Btus per pound and more than 90 percent of Alpha’s reserves have a heat content of 12,500 or higher.

Even more importantly, Alpha produces a large amount of what’s known as metallurgical coal, or “met” coal. This coal is used in the steelmaking industry and is the highest value coal in terms of price. In 2004, roughly 37 percent of Alpha’s production was met coal; a good chunk of that coal was exported to Europe or Asia for use by the steel industry.

And sulphur content isn’t a huge problem for Alpha. Roughly 90 percent of the company’s coal is less than 1.5 percent sulphur. As I outlined in last week’s Flash Alert, sulphur in coal produces sulphur dioxide when burned, a pollutant that’s regulated by the government. Utilities releasing more sulphur dioxide than permitted can buy credits, but credits cost upwards of $1,400 now, more than double what they cost a year ago. This makes it prohibitively expensive for utes without advanced scrubbers to burn high sulphur coal. As you might expect, high sulphur coals aren’t as valuable as low sulphur reserves.

The problem with Central Appalachia isn’t the quality of the coal, but the difficulties associated with mining it. This region has seen nearly continuous mining activity for well over 100 years. Just as oil fields or gas fields age over time and become harder to produce, so do coal beds. There remains plenty of coal in Central Appalachia, but it’s becoming increasingly difficult to produce that coal.

Much of the coal in the region is not accessible to the surface–it can’t be strip-mined. Instead, producers use a variety of underground techniques such as room-and-pillar mining to gain access to the coal. In room-and-pillar mining, large rooms are cut in the coal bed. These rooms are supported by pillars of the coal: Large rectangular pillars are left in place to shore up the roof of the mine itself. The coal is then cut using special equipment. When miners reach the end of a seam, they often harvest the coal from the pillars themselves, allowing the mine to gradually collapse.

As you might expect, room-and-pillar mining is a rather complex process that requires significant worker training. This is particularly true as miners in Central Appalachia are often targeting thinner seams of coal. Sometimes, miners are working in spaces no more than a few feet tall. Having to go underground for coal and targeting thinner seams is more difficult, expensive and less productive. Roughly 80 percent of Alpha’s coal is mined underground.

It should come as little surprise that the miners focused in the east are having considerable trouble meeting their production goals and targets. During Alpha’s conference call back in early November, management outlined some trouble its been having with its contract mining operations. Basically, Alpha operates the vast majority of its mines using its own employees and equipment. But a portion of its mining (roughly 10 percent by the end of this year) is done via contracting–the company hires outside firms to handle the mining operations.

In the third quarter, Alpha’s contract miners fell some 200,000 tons short of planned production. These contract miners fell short of target by more than 600,000 tons in total for the first three quarters of the year. And at least some of that production shortfall was the higher grade, expensive met coal.

To make up for the shortfall, Alpha had to actually go out in the spot market and purchase coal to fulfill its contracts to utilities and export customers. That’s a big problem because costs of buying coal on the spot market are far higher–$11 per short ton higher in the third quarter–than the coal Alpha should have received from its contract miners.

Alpha’s management team also went on to describe some other issues with its contract mines. Many of these mines are located in southern West Virginia, a region with some of the highest-grade met coals anywhere in the world. But management has repeatedly described the region as geologically challenging–the coal seams are getting thinner and harder and more expensive to produce. Some of its contract miners in the region were facing mining costs of upwards of $80 per short ton. Even for high value met coal trading in the 90s, that doesn’t leave a comfortable profit margin.

Alpha has now taken over several of these mines, bringing the entire mining operation in house. That has reduced the company’s reliance on contract mining and may well improve the cost of mining operations in this region. It’s possible that Alpha will be able to improve operations enough to start meeting production targets from these mines, reducing the need for expensive open-market purchases of coal. But even since taking over these mines, Alpha has admitted its had difficulty retaining employees. Labor cost inflation is a huge problem industry-wide.

Alpha’s warning on its 2005 outlook in early December was probably more due to transportation bottlenecks than any other factor. There’s a shortage of railroad capacity nationwide and, as I outlined in the last issue (see TES, November 30, 2005, Not So Easy, there’s a shortage of barges to move coal via waterways. Alpha has had difficulty getting its coal from mine to market. This is particularly true for met coal. Due to some major hurricane-related disruptions earlier this fall, Alpha has seen delays in exporting its met coal via ports in the New Orleans area.

The company’s management team is capable and experienced and I like some of the steps they’re taking to reduce exposure to contract mining. But they do face some major difficulties in meeting production targets from their existing, challenging mines. It will also take time for Alpha to improve operations at its former contract mines. And transportation difficulties for met coal are likely to persist for some time.

These major roadblocks are behind Alpha Natural Resources’ (NYSE: ANR) marked underperformance. I’m adding the stock to How They Rate with a sell recommendation.


The Labor Problem

But Alpha is certainly not the only coal company that is experiencing difficulties. I also see Consol Energy and Massey Energy as extremely vulnerable to further declines even if coal prices continue to rise.

I’ve long rated Massey (NYSE: MEE) a sell in How They Rate, and I’m adding Consol (NYSE: CNX) to the table as a sell.

Perhaps the most troubling problem these companies face is labor. At the Bear Stearns Commodity Conference in early December, Consol Energy CEO Brett Harvey gave a lengthy presentation. He was later asked specifically about labor costs and the employment picture. He stated that the average miner in the Eastern US is 52 years old. As you might imagine, when coal prices were depressed in the 1990s and many of the mining companies were money-losers, the industry didn’t attract a great deal of younger workers. Moreover, especially in the Central Appalachia region, the seams of coal are getting thinner and deeper, necessitating underground mining operations in relatively tight, cramped mines. Apparently, this is not the sort of work that attracts younger workers.

At any rate, the big coal companies are instituting a number of programs to train and attract younger miners. Mainly this involves instituting extensive training programs. Also–clearly–this involves pushing up wages to make the work more attractive. Nonetheless, it doesn’t appear to be working well: Both Alpha and Massey, two of the more focused players in Central Appalachia, have reported high turnover rates. Massey reported, for example, that despite spending big on its training program, the company still has problems with high turnover, particularly among younger miners who join the company and leave within a year.

With the average age of eastern miners creeping higher and no new, young miners entering the trade, it’s easy to see that retirements of experienced miners will continue to put upward pressure on costs. This is particularly true for mining companies that rely on underground mining operations–underground mining requires more training, more workers to mine the coal and is more dangerous (though significant progress has been made on that score). High turnover will hit the underground miners hardest.

Equally problematic is more skilled labor. Several of the coal companies have reported trouble retaining specialized, experienced electricians and mechanics or even experienced machine operators. With a labor shortage industry-wide, such workers can more or less pick which company they’d like to work for.

Massey is the most vulnerable to the labor problem. The company is relying on expansion in production from the Central Appalachian region and has experienced considerable difficulty meeting targets. This will only continue.

Consol’s base lies further to the north, where geological conditions are less troubling. At least according to the management team, declining mine productivity has been slightly less of a problem for them. That said, Consol’s reserves are mainly high sulphur coal, coal that can effectively be burned only by utilities with the most advanced scrubbers. These coals currently trade at a discount to low sulphur reserves.

The utilities across the east are starting to install scrubbers. It’s tough to get accurate numbers, but according to Consol there are about 228 gigawatts (GW) of installed coal-generating capacity east of the Mississippi River. In 2005, roughly 51 GW of this capacity was scrubbed–roughly 22 percent of that total. The rest of the market is effectively shut out for the high sulphur producers–it would be totally uneconomical to produce power due to the highs costs of sulphur credits.

Over time more utes will install scrubbers. Consol is looking for total scrubber capacity in the east to rise towards 114 GW–this will open up new markets for Consol’s coal. Because Consol’s coal has high heat content and is located geographically close to some of this new scrubbed capacity, it is well placed to grab some of that market.

There are a couple of problems with this story. First, even Consol admits that most of the new scrubbed capacity will come on-line mainly after 2007, so right now demand for high sulphur coal will remain depressed. Meanwhile, while Northern Appalachian mining may well present fewer difficulties from a geological standpoint that the Central Appalachia region, mining costs will still likely be higher than in the West. Meanwhile, several eastern utilities are switching to low sulphur coal from the Powder River Basin. Once they’ve switched and have signed longer-term supply contracts, it’ll be more difficult to switch back.

Eventually, as scrubber capacity is installed, Consol may become a good play. The company also has significant natural gas production and reserve assets that are valuable. But for right now, there remain too many uncertainties and potential pitfalls surrounding Consol (NYSE: CNX) and its stock is best avoided.


Where To Buy Coal

The only two mining companies I recommend right now are Arch Coal and Peabody Coal. I’m adding Peabody Energy (NYSE: BTU) to the Wildcatters Portfolio as a buy.

Peabody Energy is the largest coal mining company in the US, with more than 10 billion tons of total reserves. In addition, the company has assets outside the US, mainly in Australia. Peabody has reserves in all the major coal-producing regions of the US and is a major player in the Powder River Basin (PRB) in the West.

Peabody will have an easier time expanding its production in the coming years. The beauty of the PRB is that coal is located relatively close to the surface and can be mined using strip-mining methods. In the PRB, Peabody doesn’t have to resort to the room and pillar methods used in the East. Instead, the overburden–rocks and dirt covering the coal–can be stripped using tractors or a specialized piece of equipment known as a dragline.

It takes less labor to mine coal using strip methods. Furthermore, miners require less training when producing coal using these methods. Costs, including all-important labor costs, are far more predictable when it comes to surface mining operations and it’s easier to grow production. Peabody, for example, saw its productivity at one PRB mine increase by more than 23 percent simply by installing some new equipment–a dragline for stripping overburden–at the mine site.

PRB coal is also lower in sulphur content, even lower than your average low-sulphur eastern coal. As I outlined in the December 9 Flash Alert, the cost of sulphur dioxide credits makes ultra low sulphur coal particularly valuable. Spot prices for PRB coal are up more than 150 percent since January as more and more eastern utilities have started to burn PRB coal to meet environmental regulations. And Peabody has repeatedly asserted that it’s able to receive contract prices well above that spot level because the utilities are willing to pay up to lock in supply from a reliable producer like Peabody.

Of course, Peabody also has mines in the East and will be exposed to rising costs there. But, because the company is so well diversified geographically, it can actually idle some of its mines while it waits for pricing to improve. Such is the case with Peabody’s high sulphur reserves; Peabody can afford not to produce these reserves until the new scrubber capacity is installed after 2007. In this way, Peabody doesn’t have to produce higher sulphur reserves until it can get full market value for the coal.

Bottom line: Peabody has the scope to increase mine production and will have less extreme exposure to rising labor costs than the Eastern-focused miners. Better still, the miner has a sizeable number of supply contracts scheduled to come due and roll over in 2006 and 2007.

Peabody normally sells coal in four-year production contracts to its utility customers. Some of the existing contracts for PRB coal were priced in the $7.50 to $8 per short ton range, the prevailing market price as recently as the beginning of 2005. But new contracts are being priced at more than double that level–at closer to $18 per short ton.

As these legacy contracts come due, Peabody will sign new multi-year agreements that are twice as profitable. At the end of the third quarter, the company had roughly 20 million to 30 million tons of unsold capacity for 2006 and another 100 million tons (out of an original 120 million to 130 million) available for 2007. At the Bear Stearns conference in early December, Peabody stated that it would take roughly four years for all those legacy contracts to be replaced under the newer, stronger pricing regime. This spells steadily rising earnings power for Peabody.

It’s worth noting that Peabody is a leader in developing new coal technologies in the US. Obviously, Peabody is looking to expand the market for its product and close the so-called “Btu gap” I explained in the December 9 Flash Alert. The company acquired a stake in Econo-Power International, a company that specializes in converting coal to natural gas. Peabody says that several small coal gasifiers are already being used in China to supply particular customers and they’re not difficult or expensive to build. The approximate cost of producing gas from this coal is $5 to $6 per million Btus, roughly one-third the current spot price for gas. The company is also building or in permitting to build a handful of highly advanced coal-fired power plants.

I mention these initiatives not because they’ll affect the stock in the near-term; they won’t. However, as I expect oil and gas prices to remain relatively high for years, interest in these technologies–already being employed in India and China–will continue to grow in the US. This will be good news for the coal companies.

Peabody Energy (NYSE: BTU) is added to the Wildcatters Portfolio as a buy.


The Big Bottleneck

The real supply problem for coal right now remains transportation. This is a particularly big problem for coal coming from the PRB destined for the East Coast.

The vast majority of coal in the US is moved by rail; according to the Association of American Railroads, 43 percent of all cargo moved by rail is coal. That makes coal by far the railroad’s most important customer. Repairs and track maintenance in the PRB region throughout 2005 have meant that the coal mining companies have been unable to move as much coal as they’d hoped. The run all the way to the East Coast is a long haul; it’s easy for even relatively minor bottlenecks to be magnified into big problems. It’s clear that demand for PRB coal is there but that railroad disruptions have meant that the supply isn’t always available.

I’ve stated on a number of occasions that my favorite railroad for playing the coal story is Burlington Northern Santa Fe, a stock I’ve been recommending as a trade since early September. Burlington has the largest network of rail in the PRB.

Burlington Northern is Class I railroad. Class I railroads are defined as any rail with an annual operating revenue in excess of $277.7 million. This is a fancy way of saying it’s a big railroad with long-haul routes. The Association of American Railroads (AAR) compiles operating statistics on the Class I railroads; one of the key operating stats to watch is a measure known as velocity. Velocity is defined as the average speed of rail cars across the network—it’s measured in miles per hour and the faster the velocity, the more efficient the railroad. Check out the chart of Burlington’s velocity over the past year for coal trains and for an average of all of Burlington’s trains.




Source: Association of American Railroads


Going into the summer months, Burlington’s coal velocity clearly declined. Those two “spikes” to the downside around mid-year would seem to coincide with major maintenance-related disruptions in the PRB. Over the entire summer, when many of the utes with particularly low inventories might have wanted to re-stock, Burlington’s efficiency as measured by velocity remained rather low.

The point of this analysis is simple: The coal mining companies and utilities want the rails efficiency to improve. They would like to see the rails do their maintenance and add to capacity because they desperately need to move the coal. This has handed the rails something they haven’t had for well over a decade–pricing power.

All the coal miners are expecting the rails to hike rates again this year; most have publicly stated that they’re looking for further increased on the order of 25 to 35 percent. The rails suffered from overcapacity and low rates for years and simply didn’t have the cash flow to maintain and upgrade their networks. Now, several coal mining firms have actually stated they want the rails to be healthier. It seems they’re more than willing to pay the higher rates as long as efficiency improves and they can get their coal.

And we don’t have to worry about fuel costs, either. Burlington, along with the other Class I rails, has been able to pass through almost all of the increases in their diesel fuel costs to shippers as fuel surcharges. Keep in mind that just five years ago, recovering all your fuel costs via a surcharge would have been totally unheard of in the railroad industry.

The good news is the rails are finally benefiting from higher rates and rising cash flows; they’re deploying that cash to boost investment in their network. Last summer’s repairs in the PRB were absolutely necessary to ensure that the railroad could meet demand longer term.

Even better news for the coal miners and utes: All the repair work for 2005 is complete. The winter freeze has set in on the PRB so the railroads won’t do much in the way of additional maintenance until the late spring/early summer of 2006. And by all accounts the maintenance schedule for 2006 is lighter than it was this past summer. Rail traffic will likely continue to rise as utilities scramble to bring their ultra-low inventories to more comfortable levels. This is great news for Burlington.
Burlington Northern Santa Fe (NYSE: BNI) is a buy, and I‘ll continue to follow the stock as a trade recommendation in How They Rate and via periodic flash alerts.

There’s another group of rails called the Class II (or regional) railroads. As the name suggests, these rails own shorter regional networks of rail. For example, a regional railroad might own a short haul line between two cities.

Regional rail networks connect with the long-haul Class I networks. Coal and other goods can be loaded off the Class I systems and onto the regional networks for transport to individual power plants or storage facilities. Alternatively, the regionals also act as feeders from mines to Class I networks at the production end of the supply chain. Like the Class I rails, the regionals are also clearly seeing growth in demand for coal transport. They too have been able to raise their hauling rates to reflect the increased demand and limited supply.

Among the regional rails, my favorite play is Genesee & Wyoming. The company owns or leases roughly 9,300 miles of track mainly in the US but also in Australia and South America. In total, the company gets roughly 76 percent of its income from US operations and 23 percent from Australia, with South America only making up about 1 percent of the earnings pie.

The company operates track in several different parts of the US, including Utah, Louisiana, Florida and Illinois. But just to give a flavor of the types of rail links the company owns, check out the map below.




Source: Genesee & Wyoming


This map shows Genesee’s network in New York and New Hampshire. The regional rail network connects individual cities in the region to rail hubs. In fact, this region is one where the company has stated it’s seeing more interest in PRB coal shipments–some utes in New York and Pennsylvania are starting to use PRB coal.

Roughly one-fifth of Genesee’s freight revenues come from coal and 30 percent of the freight cars are loaded with coal. This makes coal solidly the most important commodity Genesee hauls. And these are global totals; in North America, coal makes up an even larger percentage of car loadings.

The North American coal business is booming for Genesee. The company has managed to push through price increases and has been keeping a firm lid on costs. The key measure of cost efficiency for regional rails is the operating ratio, a measure of operating expenses as a percentage of total revenues. The lower the operating ratio, the more efficient the railroad. While there’s no magic number, here’s a rule of thumb: Any rail with an operating ratio near or under 80 percent is considered very healthy. In North America, Genesee’s operating ratio stands at 79.4 percent, down from a shade less than 83 percent a year ago.

What’s most impressive about this declining operating ratio is that efficiency is improving despite rapidly rising fuel costs. The regionals lagged the class I rails in imposing fuel surcharges. And because the class I rails are actually big customers of the regionals, it also took some time before the Class I rails began to pass through their fuel charges to the smaller rails. But this is changing rapidly. Globally, the company has escalation or surcharge contracts that cover roughly two-thirds of its rising fuel costs. After the first of the year, new, renegotiated surcharge contracts will begin to go into effect. These will begin to provide even higher fuel recovery payments for Genesee.

This is particularly the case in the Australian market. In this market, fuel surcharges are re-priced every 6 to 9 months and due to the rapidly rising price of diesel, surcharges in this market are lagging cost. As those contracts are re-priced, Australian operations should see improved operating ratios.

The organic side of Genesee’s revenue growth story is impressive. But the company has also been a major consolidator for the regional rail industry in recent years–Genesee has made 25 acquisitions since 1985. There is scope for further consolidation down the road. The Class I railroads have been selling off their regional networks, preferring to focus attention on the long-haul routes. Genesee has been able to buy up these smaller networks, reduce operating costs and improve efficiencies.

The only thing that has been holding back the coal business is the disruptions in the Class I rail networks due to maintenance operations in the PRB. Genesee has been making up for this bottleneck by raising rates; with most of the PRB work complete, car loadings of coal should accelerate into the New Year.

In fact, during Genesee’s conference call in November, management confirmed its customers are running on low inventories and have announced intentions to try and restock in 2006 as that PRB bottleneck eases. This spells higher traffic for Genesee.

I’m adding Genesee & Wyoming (NYSE: GWR) to How They Rate as a buy; I’ll track it via Flash Alerts and in How They Rate as a trade recommendation.

I also recommended barge company American Commercial Lines in the last TES. Barges are another important component of the coal transport problem and they’re in short supply right now. (For a complete rundown on this story, see TES, November 30, 2005, Not So Easy.)

American Commercial Lines (NSDQ: ACLI) remains a buy recommendation in How They Rate.


The Coal MLPs

The final way to play the coal boom is via my recommended coal master limited partnerships (MLPs) in the Proven Reserves Portfolio, Penn-Virginia Resources and Natural Resource Partners. These publicly traded partnerships are not coal miners; they simply hold coal-producing land that they lease out to coal miners for a royalty fee.

The benefit of the coal MLPs is that they’re not directly exposed to the cost inflation that’s plaguing some of the mining firms in the East. They don’t have to hire and train miners, nor do they have to worry about the logistics of delivering coal and ensuring the railroads are healthy. The MLPs simply lease out coal properties and receive a percentage fee depending on how much coal is produced. The actual royalty amount varies widely but is typically 5 to 6 percent for underground mines and as high as 8 to 10 percent for surface mines.

MLPs also pay out the majority of their earnings as tax-advantaged distributions–this is why Natural Resource Partners is currently yielding more than 5.2 percent and Penn-Virginia is yielding a solid 4.7 percent. (Please see TES, October 26, 2005, The Next Big Income Investment, for my long-term case for MLPs.)

One point I made in last week’s Flash Alert is worth reiterating: While Penn-Virginia is still near its 52-week high, Natural Resource Partners has been sliding since the end of November from the upper 50s to about $54. I do not see this as a long-term concern. In fact, I don’t believe that action is in any way related to the fundamentals underlying the MLPs.

The fact is that MLPs occasionally issue additional units to fund expansion. Because they don’t retain earnings like a typical corporation, they’re not able to rely on internally generated cash flows. And while the stable cash flows of most MLPs allow them to carry significant debt, I prefer MLPs that keep their debt loads relatively low.

At any rate, when new MLPs are listed or existing MLPs issue units, you tend to see a drop in the entire universe of MLPs. This is because MLPs still have a relatively narrow shareholder base; traditionally, institutional players were all but barred from investing in partnerships. To put this point another way: It doesn’t take much selling pressure to push the MLPs lower. This is changing as institutions get more involved in the market–there’s more demand for the asset class so the MLPs can better weather periodic issuance-related selloffs.

In November, we saw higher-than-normal issuance of MLPs and I believe that triggered the dips in some of the recommended MLPs. This is nothing new; last spring, for example, most of the MLPs sold off hard after a wave of new issuance. Historically, these issuance-related dips have been buying opportunities. As soon as the new supply is absorbed, the MLPs start heading higher again.

I’m not changing my recommendations on any of the MLPs. I still regard these securities as excellent income-oriented vehicles that are relatively sheltered from commodity price volatility. In fact, several of the recommended MLPs have recently upped their payouts–Enterprise Products Partners is now paying out an annualized 7 percent. When you combine yields of 5 to 8 percent with growth in payouts of 5 percent or more annualized, the total return over time should be impressive.

Patience will be key, however, as these are long-term, income-oriented investments.

Penn-Virginia Resources (NYSE: PVR) and Natural Resource Partners (NYSE: NRP) remain buys in the Proven Reserves Portfolio.