There was no shortage of attractive candidates to profile here this month, in an industry continuing to profit from low interest rates and strong demand for new energy infrastructure. And indeed I’ve made two new Buy recommendations in the Sector Spotlight section of this issue, focusing on large publicly traded general partners with modest yields but extremely attractive safety and growth profiles.

Here I’ll focus instead on two portfolio stalwarts doing an excellent job of absorbing new assets and proving the skeptics wrong with robust market action. 

Fuel pipeline and crude storage operator Buckeye Partners LP (NYSE BPL) was in the world of pain a year ago, as weak fuel demand, inventory liquidation losses, a rate beef that postponed pipeline tariff increases and the need to invest in upgrades of big new acquisitions combined to drive distributable cash flow well below the payouts it was making.

To avoid the threatened loss of its investment-grade credit rating, Buckeye broke a string of 31 straight quarterly distribution increases, holding payouts flat for the next year. Perceptions of an overleveraged balance sheet and disappointing operational results drove the unit price from its long-time range near $65 to as little as $45, a discount that could still be had as recently as Christmas Eve.

This year is playing out much better, as the uncommonly mild winter of 2011/12 was followed by a much colder and more profitable heating season of 2012/13 and the rate beef has been partially resolved, permitting long-sought tariff increases.

Meanwhile, investments in a Bahamas crude storage facility and a refined fuels terminal in lower New York harbor have begun to pay off.  Adjusted EBITDA rose 38 percent year-over-year in the first quarter, aided by a 31 percent profitability surge in the core pipelines and terminals segment and a tripling of international revenue. The investment-grade rating is no longer in any immediate danger.

Source: company presentation

The distribution coverage improved to 1.21 from just 0.78 a year earlier, emboldening Buckeye to increase its distribution. And while the 1.2 percent hike wasn’t that impressive in its own right, management signaled on the conference call that it marked a return to steady growth in distributions.

The coverage could temporarily go below 1 again sometime next quarter as the B shares used to finance the Bahamas acquisition convert to regular units, increasing the cost of cash distributions by approximately 9 percent. But Buckeye now expects to cover all of its increasing payouts out of distributable cash flow on an annual basis, and the coverage ratio should increase from there as the recent investments continue to produce solid returns.

The unit price has been rising for much of the year, but got another boost from the announcement of a higher distribution, since many were not anticipating an increase for another year. After testing record highs near $70, the price has pulled back a bit to $65.

Rapid gains in production from unconventional US reservoirs and major changes in the US refining industry have stoked strong demand for expanded fuel storage capacity, with Buckeye’s terminal throughput volumes up 6 percent over 2012 and 30 percent over 2011 on the strength of the Bahamas acquisition and expansion.  The Perth Amboy, NJ facility purchased last year from Chevron (NYSE: CVX) could become a strategic lynchpin for Buckeye, serving as a railroad crude terminal and blending facility in addition to providing premium storage next to a key energy-trading hub at the New York Mercantile Exchange.

Buckeye’s concentration in the Northeast and Midwest could also make it a key player in transporting liquids from the quickly developing Utica Shale in Ohio. Given the partnership’s heavy investments over the last three years, the distribution growth in 2014 and beyond could top this year’s likely 5 percent rate. And in the meantime the 6.4 percent yield provides plenty of value. We’re raising our maximum buy price to $70 as a result.

DCP Midstream Partners LP (NYSE: DPM) reported strong quarterly results last month despite some noise from the accounting treatment for dropped-down assets. The 10^th consecutive increase in the quarterly distribution represented a 6 percent year-over-year bump, leaving the partnership on track to meet annual distribution growth targets of 6 to 8 percent in 2013 and 6 to 10 percent next year.

It helps that DCP Midstream has two thriving corporate parents in the gas utility Spectra Energy (NYSE: SE) and refiner Phillips 66 (NYSE: PSX), each with a 50 percent stake in the unlisted DCP Midstream general partner.  Both companies face big capital spending needs, and are likely to take advantage of DPM’s investment-grade credit rating and competitive cost of capital to continue the dropdowns fueling much of the recent growth.

Source: company presentation

The latest came in the form of an additional 47 percent interest in an Eagle Ford gas gathering and processing network, bringing the MLP’s stake in the venture to 80 percent. The extra 1.2 billion cubic feet of gas processing capacity from the nation’s fastest-growing shale play will be a reliable cash flow source for DPM, and even more so in future years as the build-out of natural gas processing and export capacity boosts depressed natural gas liquids prices. In the meantime, the partnership has largely hedged its commodity exposure through 2015. There’s also upside from organic growth projects like the expansion of an NGL storage facility in Michigan and from an increased volume of liquid propane exports from the partnership’s Chesapeake, Va., marine terminal.

In the short term, the accelerated pace of dropdowns and investment is taking a toll on the traditionally robust distribution coverage ratio, which slipped to 1.12 in the most recent quarter from 1.25 at the end of 2012. The ratio could dip further for the year as DPM finances future growth, but the partnership expects a return to its targeted 1.1-1.2 range as those projects come on line.

The unit price challenged the all-time highs dating back to 2007 in the wake of the latest results, and could soon push past those levels despite the recent correction. The combination of a solid current yield (5.9 percent) and clear avenues for growth in distributions should continue to attract investors despite the growing drain of the general partner’s incentive drawing rights. We’re raising our buy below target to $50.