The leaves have turned and sentiment for MLPs appears to be following suit, as dealmaking reveals strong market appetite for income with a growth kicker.

You wouldn’t necessarily know this from the performance of the benchmark Alerian MLP Index, which has corrected sideways from May highs and has significantly underperformed the broader energy sector as well as the S&P 500 over that span.

But note that the largest IPO of the year took place only last week and related to a master limited partnership, as insiders raised $2.7 billion from the sale of a minority stake in Plains GP Holdings (NYSE: PAGP), the incorporated repository of general-partner interests and incentive distribution rights in Plains All American Pipeline L.P. (NYSE: PAA), one of the largest MLPs.

According to Hinds Howard of MLP HINDSight, PAGP’s resulting indicative yield of 2.7 percent was the lowest ever for a GP offering. The lower the yield, of course, the stronger the investor demand and growth expectations. So even though the deal priced at the bottom of the forecast range, investors still paid top dollar based on comparable past transactions.

Of course, the past didn’t feature rates quite this low, nor comparable demand for midstream infrastructure from this great a variety of drilling basins.

Nor did the past feature quite such a big disparity between MLP valuations and those in the rest of the energy sector, sparking quite the same rush of MLP spinoffs by corporations.

Devon Energy (NYSE: DVN) recently joined the club by announcing plans to spin off some of its midstream assets into an MLP, as a way of capitalizing on the much stronger valuation MLPs enjoy. The money raised could be presumably deployed for investments elsewhere.

Instead, Devon announced today that it would instead combine its US midstream assets with those of Crosstex Energy (Nasdaq: XTXI) and those of the MLP it manages, Crosstex Energy L.P., (Nasdaq: XTEX) into a new MLP to be listed alongside its corporate general partner. Devon’s contributing to the MLP its gathering and processing assets in the Barnett Shale near Dallas as well as Oklahoma’s Cana and Arkoma Woodford shales, its interest in fractionation plants on the Texas coast as well as $100 million in cash, for a total investment of $4.8 billion.

Crosstex brings to the table its own overlapping assets in the Barnett, strategically important pipelines in Louisiana, ambitious expansion plans in the Ohio River Valley as well as the Texas shale basins, and an experienced management team that will run the combined operation, even as Devon retains a majority stake and ultimate control.

Far from extracting Devon from the midstream business, the deal gives the gas and oil producer a much bigger stake in midstream’s continued growth.

Investors will get an opportunity to buy a partnership less reliant on a single customer but with the long-term acreage and minimum volume commitments from its committed corporate parent. The MLP will have relatively low leverage, investment-grade credit, a largely fee-based business increasingly profiting from natural gas liquids and petroleum and fast-growing distributions that will improve on what Crosstex has been paying out while still revaluing Devon’s assets at a much higher earnings multiple.

The market paid heed to these advantages, rewarding Devon with a 3.3 percent share price rise. XTXI shares, meanwhile, soared 71 percent, while XTEX units appreciated 33 percent. Not a bad windfall for investors in the only MLP involved in a deal capitalizing on elevated MLP valuations.

The takeaway here is not that MLPs are overpriced but rather that the market continues to undervalue some of the midstream assets on producers’ books given the tax efficiency of MLPs as well as the strong demand for additional infrastructure.

XTXI shareholders have been promised a 50 percent dividend boost next year  (for a prospective 2014 yield of3.2 percent at today’s premium price) as well as long-term dividend growth of 20 percent or more annually. XTEX shareholders can look forward to an 8 percent distribution boost next year and comparable increases longer-term.  As for Devon, its contributions have been valued at 11 times Ebitda, vs. the 6.5 times enterprise valuation for the entire company, and Devon has retained control as well as a lion’s share of the upside from continued growth.

This looks to be a win-win deal, especially for Devon, whose shares may not yet fully reflect the merger’s long-term benefits.

Portfolio Update

Kinder Morgan Answers Critic

While Devon and Plains GP hogged the limelight, Growth Portfolio holding Kinder Morgan (NYSE: KMI) remained in investors’ doghouse despite reporting in-line quarterly results and providing the expected increase in the distributions. KMI will pay out 41 cents per share for the third quarter to shareholders of record as of Oct. 31, representing a 2.5 percent increase from the second quarter and a 14 percent year-over-year gain in line with management guidance.

The main gas transportation business at the flagship affiliate partnership Kinder Morgan Partners (NYSE: KMP) continued to do well while recent acquisitions have not yet proved rewarding, with cash flow at El Paso Pipeline Partners (NYSE: EPB) held back by recent rate settlements, for example.

Kinder Morgan’s board did increase its share buyback authorization, and management allowed the young Hedgeye analyst who last month challenged the partnership’s accounting to ask a series of pointed questions on the post-earnings conference call. He landed no punches. Asked by another analyst on the conference call about KMI’s valuation, chairman Richard Kinder pointed to the 4.5 percent yield and plans to grow it by up to 10 percent annually from current levels. “Units are tremendously underpriced,” he said. We still agree. Buy KMI below $42.