The first rule is quite simple: The partnership must pay you. A reliable and growing stream of cash distributions distinguishes successful investments from the also-rans and indicates that the partnership continues to expand profits. This is obviously preferable to common stock companies that offer only an IOU for returns in the hopes that the market might bid up share prices.

Accordingly, we focus on partnerships that have a sustainable business; that is, the underlying assets must continue to produce revenues and profits through a variety of economic environments.

Third, the partnership in question must be financially sound, with enough cash and liquid assets to cover both expected and unexpected outlays. This involves ensuring that borrowing expenses are manageable and the company’s access to credit remains unfettered; even the best businesses can find themselves in serious trouble if the cash runs out or its well of credit runs dry.

Market risk is the final dimension that we examine when selecting and vetting our portfolio holdings. Partnerships are subject to the whims of the marketplace just like common stocks; although strong fundamentals are usually adequate security, share prices can and do come under duress. The broad market selloff in the wake of Lehman Brothers’ bankruptcy and the wild volatility is a testament to this risk. But it’s important to remember that timing near-term moves is a maddening and relatively fruitless exercise. Hindsight may be 20-20, but foresight as it relates to short-term volatilities is opaque at best. Rest assured that partnerships with solid fundamentals will continue to pay quarterly cash distributions.

Of course, those who rest assured must also be vigilant. We’re constantly monitoring market conditions and assessing the sustainability of each of our recommendation’s distribution payments.

A Stronger Partnership

Thus far following our four rules has paid dividends. Although the past month has wreaked havoc on the broader stock market, MLPs are beginning to fare better.

The Alerian MLP Index charts the performance of a collection of partnerships and other passthroughs, many of which operate in the energy sector.

Over the past month this index was actually up in price by more than 3 percent, while total returns were in the neighborhood of 5 percent. That compares quite favorably to the broader US stock market, which posted an 11 percent loss over the same period.

This meager outperformance is evidence that investors are beginning to regard publicly-traded partnerships–and their outsized yields–as attractive defensive plays at a time of market turmoil.

But not all partnerships are created equal: a closer examination of the Alerian MLP Index reveals that within the segment of petrol-related partnerships, those involved with oil and natural gas production have lagged those that operate pipelines.

What’s eating petrol producers?  A glance at the movements in oil and natural gas prices over the past few months tells the story. As the graph below shows, spot prices for natural gas and crude oil have fallen precipitously since the commodities bubble burst in July.

Crude oil is down over 54 percent, while gas prices in the spot market have sagged by more than 46 percent. This begs the question, why on earth would anybody want to buy and own petrol producing partnerships?

But what that question doesn’t explore is the extent to which commodities prices impact petrol producers’ revenues and asset values. In Don’t Fear Commodities, my partner Elliot Gue explains why tumbling oil and natural gas prices aren’t as big of a factor for the bottom line revenues of our portfolio holdings, especially those that tightly control production costs, have manageable debt loads and are well-hedged against declining commodities prices.

But even though our petrol producers currently make the cut in terms of their business and financial health, heightened market risk stemming a freefall in commodities prices is prompting us to sell some of our producers in favor of partnerships in the transport, pipeline, processing and distribution businesses.

We recommend selling BreitBurn Energy Partners (NSDQ: BBEP), Atlas Energy Resources (NYSE: ATN) and Legacy Reserves (NSDQ: LGCY).

At the same time, we continue to recommend that you buy Linn Energy (NSDQ: LINE), a producer that has sold off some of its properties that entailed higher production costs. Linn’s management has also demonstrated an aptitude for establishing successful hedges, and the company’s handling of disruptions caused by Lehman Brothers’ bankruptcy was particularly adept.

Aside from scaling back our positions in petrol producers, we also recommend selling Canadian Energy Services (TSX: CEU.UN, OTC: CESVF), which provides field services for exploration and extraction. As producers cut back on development in light of lower market spot prices, service providers could sell off regardless of their business prospects.

And these pricing woes aren’t limited to oil and natural gas; other fossil fuels have come under pressure as well. Although Penn Virginia Resources (NYSE: PVR) should continue to command attractive prices for its coal, the outlook is less sanguine for other regions–a development which could have negative ramifications for some shipping-related investments.

The Baltic Dry Index, which tracks the spot shipping market, demonstrates this concern. It’s down over 90 percent on annual basis and has dropped precipitously over the past few months.

Based on this trend, share prices of Navios Maritime Partners (NYSE: NMM)–though still profitable at lower shipping rates–could face significant headwinds going forward. As with our petrol producers, we recommend selling Navios Maritime Partners.

While market risk in the petrol production and dry-bulk shipping segments has been rising, the market is figuring out that pipelines and so-called mid-stream petrol processors and distributors are an attractive investment. Indeed, these are the tranches that have been outpacing the other components of the Alerian MLP Index.

Kinder Morgan Energy Partners (NYSE: KMP) is a prime example. This pipeline and related midstream and storage partnership has outgunned the turn in the Alerian MLP Index, generating an overall return of just under 8 percent for the past month.

And given the discounting of the overall PTP market over the prior months, you can buy new shares of Kinder Morgan at just a tick or two above trailing revenues–near a 30 percent discount from recent highs.

Along with Kinder Morgan, we also recommend shifting your money to other key midstream and pipeline PTPs, including Sunoco Logistics (NYSE: SXL), Enterprise Product Partners (NYSE: EPD) and TEPPCO Partners (NYSE: TPP). For maximum safety, these should form the basis of your partnership portfolio.