Most master limited partnerships hail from the energy industry. And as that’s the proven model—as well as our chief expertise—that’s where most MLP Profits recommendations will come from.

 

In the article attached to the Conservative Holdings section (see Home Page), we highlighted the key differences between MLPs in terms of risk and reward. The Conservative Holdings represent the absolute safest, most secure cash flow streams around.

 

Conversely, the Aggressive Holdings profiled in this section are the highest potential reward plays in the MLP universe, as well as the highest risk. We’re starting with two charter members of this group: Linn Energy (NSDQ: LINE) and Regency Energy Partners (NSDQ: RGNC).

 

Both are heavily leveraged to energy prices. As a result, their cash flows are potentially very volatile, as are their distributions and share prices. The opportunity now is that energy is down and their share prices are down even more. As a result, not only can patient investors score distribution yields of 15 percent. But with both MLPs selling at a fraction of 52-week highs, there’s the potential for doubles or better in the share’s prices in coming months. Linn Energy is a fast-growing producer of oil and natural gas from fields located in the Mid-Continent of the US and California. Linn’s focus is mature fields that have very reliable geology and therefore predictable yields and costs. That’s an ideal formula for paying distributions. Some of the company’s fields in California, for example, have been in operation for close to a century.

 

>As pointed out in the Premium Master Limited Partnerships: High Yields and Low Taxes, mature wells also feature substantial opportunities for increasing yields and prolonging reserve life, thanks to new technology. Linn currently has about 1.7 trillion cubic feet of gas-equivalent reserves, with about half of reserves natural gas. Close to 70 percent are proved, developed reserves, about as certain as you can get in the energy business. It also has more than 4,000 potential locations for new wells on its existing plays to grow output when the time is right.

 

Long-term, Linn’s cash flow depends heavily on what happens to energy prices. For the next two-and-a-half years, however, it has little to worry about, as all current output is fully hedged at very high prices. If energy prices fail to rebound by then, a distribution cut will likely be unavoidable. On the other hand, that’s a lot of time for prices to rebound. And management will always have the opportunity to lock in future prices on price spikes, just as it did last summer. Another two-thirds of planned output for 2012 is also locked in. Buy Linn up to 20.

 

Our other Aggressive Holdings Charter member, Regency Energy Partners (NSDQ: RGNC), is not a producer of oil and gas. Rather, it’s a small MLP that operates gas processing and gathering lines as well as small diameter pipelines that connect individual wells to the pipeline grid.

This business is leveraged to commodity prices mainly because throughput of gathering systems depends entirely on production decisions. If prices are low, producers cut back on output and throughput falls. That has an impact on Regency’s fees, though it has gone to capacity-based contracts to some extent to cut back this exposure.

Looking ahead, the MLP has some pretty substantial growth opportunities through its Haynesville Expansion Project, a line with capacity of 1.1 billion cubic feet per day that will transport gas out of Louisiana’s prolific Haynesville Shale gas play. Haynesville is becoming the lowest-cost and highest potential natural gas play in the US, with projected reserves five times the current largest US field. The only problem is a lack of pipeline capacity, which again Regency is positioned to provide and cash in on.

Regency’s small size could be considered a hindrance to completing large projects, particularly in a tight credit environment. But by partnering with GE Financial Services and private equity firm Alinda, management has already lined up funding for Haynesville, and expects cash flows from the new project to maintain its 15 percent-plus yield regardless of the path of commodity prices. Aggressive investors can buy Regency up to 15.