The downdraft in energy has certainly been dramatic, and there can be no guarantees that it’s over just yet. This is not the time to chase after the biggest discounts, which could grow even larger if energy and stock prices keep sliding. Better to shop for conservative investments with a solid safety margin and plentiful upside if and when sentiment does improve.

That’s a fair summary of Spectra Energy (NYSE: SE), the corporate parent and general partner of Spectra Energy Partners (NYSE: SEP). Over the last year we’ve been very fortunate with timely picks of Energy Transfer Equity (NYSE: ETE), Williams (NYSE: WMB) and Targa Resources (NYSE: TRGP), as part of a deliberate strategy to gain more exposure to MLP sponsors. Spectra doesn’t quite have the growth of an ETE or a TRGP. But it does offer plenty of downside protection, and some of the same value extraction levers Williams has successfully pushed.

As for its business, in the current environment it’s probably best to start with what it’s not. As in, it’s overwhelmingly not involved with crude, beyond a couple of pipelines so busy that Spectra is now looking to build new ones along the same Alberta-to-Midwest route. The company is mostly a natural gas transporter, although it also owns a Canadian distribution subsidiary as well as a 50% stake in the leading gas gatherer and processor DCP Midstream (NYSE: DPM).

Business in the first half of the year was very good, delivering a 10% EBITDA increase and a 21% distributable cash flow boost from a year earlier.

Source: Spectra Energy

The centerpiece of the company’s US gas pipeline network is the 9,000-mile Texas Eastern Transmission system, which links the old Gulf Coast gas production centers to utilities and industry consumers in the Northeast. The Texas Eastern passes over the Marcellus shale in Pennsylvania and West Virginia that has become a leading source of shale gas production. It has therefore become the backbone of expansion projects seeking to deliver Marcellus gas to the Gulf Coast, Southeast US, Midwest, Ontario, New England and Eastern Canada.

Spectra dropped down all of its US pipelines to Spectra Energy Partners late last year, and that MLP now accounts for roughly half of the parent company’s cash earnings. A gas distribution subsidiary in Ontario and a gathering and processing operation in eastern British Columbia each account for 20% of recent earnings. The rest comes from DCP Midstream, whose general partner Spectra co-owns with Phillips 66 (NYSE: PSX).

A hedge fund activist pressed the company last year to sell off spin out its Canadian operations as well as its stake in the DCP Midstream general partner, which would almost certainly be worth more under a single owner that wasn’t paying income tax, rather than two that are, as currently. But his stake was so small that Spectra’s management has found it easy to ignore the advice to this point. Perhaps a bigger, more aggressive activist might leave more of an impression.

At the moment, the company has plenty on its plate with growth projects valued at $8 billion under way and another $20 billion worth in development. The latter include recently unveiled $3 billion expansion of the Texas Eastern, Algonquin and Maritime pipelines to bring more Marcellus gas to New England by 2018, and a $3.7 billion project to ship gas from the Northeast and the Texarkoma region to fast-growing Florida starting in 2017.

These projects include strong partners, but Spectra’s reasonable leverage and solid dividend coverage will certainly allow it to shoulder its share of the cost. Its share of the profits from SEP and DPM is expected to grow from a combined $885 million this year to nearly $1.2 billion in 2016. And it could always try to monetize the Canadian assets.

Spectra’s attractive East Coast footprint could eventually draw a strategic bidder from among its rivals.

In the meantime, Spectra does face some headwinds. The weakening Canadian dollar is one, and the recent weakness in the price of natural gas liquids pegged off crude will also be a drag on earnings. The company estimated earlier this year that a drop in crude prices from $95 to $80 a barrel would cost it $37 million in annual DCP Midstream profits, or a little more than 10% of Spectra’s expected total.

Still, the dividend coverage is ample enough and the growth project slate attractive, not least because it builds off an existing backbone. Many Marcellus hubs are discounting natural gas to half its price at the Henry Hub in Louisiana for lack of takeaway capacity, leading to strong demand for new shipping options from producers as well as a variety of US and Canadian customers.

We’re adding Spectra Energy to the Conservative Portfolio. Buy SE below $42.

 Delek Logistics Strikes in Rich  

A strong financial position is also the distinction shared by this month’s other pick, Delek Logistics (NYSE: DKL). The 4.9% yield it offers today is second among refinery logistics MLPs only to Holly Energy Partners (NYSE: HEP), but DKL offers much more growth in the near term, and its strong fundamentals support its recent pledge to increase distributions by 15% annually.

In fact, distributable cash flow in the last quarter nearly doubled year-over-year, boosted by strong gasoline wholesale margins. The distribution rose 20% year-over-year, with 2.0x coverage. Over the first six months of 2014, the distribution coverage was a strong 1.78x. Net debt amounts to just 2.5 times annualized first-half EBITDA, giving the partnership plenty of flexibility to keep acquiring assets from its sponsor Delek US Holdings (NYSE: DK) as well as third parties.


Source: Delek Logistics

DKL’s logistics assets serve its sponsor’s two refineries, in El Dorado, Arkansas, and Tyler, Texas, with a combined throughput capacity of 140,000 barrels per day. Delek Logistics feeds the El Dorado refinery via a connector pipeline carrying third-party crude as well as a 600-mile oil gathering system that surrounds that plant.

It also blends and stores the output of Delek’s refineries at terminals located in Memphis and Nashville, Tennessee, North Little Rock and El Dorado, Arkansas and Tyler, Texas. These, in turn, serve the parent company’s network of 363 filling stations in seven states, mostly in Tennessee, Alabama and Georgia.

Delek Logistics also owns a 195-mile crude pipeline linking Longview in northeast Texas to Beaumont on the coast, currently contracted to a major oil company and due for a renewal and possibly a rate increase at year’s end. Its tanks can store a total of 7.6 million of crude and refined product, including 1 million of product storage in west Texas supporting two terminals and a wholesale marketing operation. That segment did particularly well in the last quarter thanks to refinery maintenance in the region, and should remain a bright spot given the brisk drilling activity in the surrounding Permian Basin.

Recent results have also been boosted by dropdowns from the sponsor and there are more of these to come, including crude storage at Tyler and a rail terminal at El Dorado. On Oct. 1, Delek Logistics expanded its east Texas presence with a $10 million purchase of a light product terminal, an associated storage facility and a 76-mile pipeline connecting the two from Magellan Midstream Partners (NYSE: MMP). The acquisition was attractively priced at 7.1x EBITDA.

Because Delek Logistics operates under long-term (generally 5- and 10-year) agreements with its sponsor providing for minimum volume commitments and indexed rate increases, its cash flow has plenty of downside protection. But there’s still plenty of upside given the parent’s work to expand the capabilities of its refineries and its inventory of future dropdown assets.

We’re adding Delek Logistics to our Conservative Portfolio. Buy DKL below $42.