Most master limited partnerships hail from the energy industry. That’s where our focus in MLP Profits is going to be for three reasons. First, it’s the only real proven model for MLPs, and the only one to truly weather the market calamity of the past year. Second, it has incredible potential as America transitions to becoming a major global exporter of natural gas. And third, it happens to be where our chief expertise lies.

 

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 Portfolio features the MLPs with the highest potential rewards and manageable risk.

 

Below, we highlight a group that falls somewhere in the middle. They’re not wholly immune from economic ups and downs, or fluctuations in energy prices. But they are solid enough to withstand all but the worst possible conditions, as they’ve proven the past year. Their yields are generous and they have substantial upside, mainly from aggressive business plans that continue add assets at a fevered pace.

 

As you’ll find in coming weeks, this is the group where risk varies most widely. It’s also the group with the greatest number of potential members. As a result, it’s also likely to wind up with the biggest portion of the overall MLP Profits Portfolio.

 

For now, however, we’re starting with only one selection: Teekay LNG Partners LP (NYSE: TGP). Not surprisingly, its yield is right in the middle between our three charter Conservative and two Aggressive Holdings. That’s also a pretty good indication of where its risk lies, as well as its potential for outsized capital gains.

 

Teekay LNG as its name suggests is involved in the shipping of liquid natural gas globally. Traditionally, while oil has long been a global market, natural gas has been almost entirely a regional market. What is produced on one continent can be shipped vast distances via pipelines, but it largely stays on that continent.

 

As a result, unlike oil which is shipped everywhere, the price of gas tends to be set in the region where it’s produced. That’s set up some incredible price dichotomies around the world. Currently, for example, North American gas is trading for less than $4 per million British Thermal units, a fraction of its price in Asia and Europe.

 

LNG or liquid natural gas is the solution to getting cheap gas where it’s needed most. Basically, gas is cooled to a very low temperature where it becomes a liquid that can be shipped over great distances. Then, upon arrival, it’s heated again and becomes a gas that can be transported via pipelines.

 

The gas molecules are far closer to gather in liquid form than they are in their natural gaseous state. As a result, huge volumes of gas can be shipped as LNG, particularly with recent technological advances.

 

The global LNG trade has averaged nearly 8 percent annualized over the past decade, but accelerated to a whopping 11.7 percent last year. One reason is that gas reserves near many big consuming markets have been depleted and production is falling. Imports of natural gas are, therefore, absolutely crucial to meet growing demand and fill the gap left by falling domestic output. That’s especially true in Europe and Asia.

 

Here in North America, we have the opposite problem. Advances in drilling techniques have made it suddenly possible to access huge deposits of shale gas, well in excess even of North American demand. Coupled with the deep recession and its depressing impact on industrial production, this has triggered an immense glut of natural gas, particularly in the US market. Prices have crashed for gas below reserve replacement and even production costs in some regions and producers are shutting in output as rarely before.

 

Enter LNG as a solution. When the facilities now available for LNG shipping were first constructed, most people thought they would be used for imports to feed the ravenous North American market, particularly once carbon dioxide regulation triggered a “rush for gas” by US electric utilities. Instead, the most likely use of LNG infrastructure long-term is likely to be for exporting abundant US gas production to overseas market where the fuel is scarce.

 

The US in fact could easily become the world’s largest exporter of natural gas globally. The only catch is a lot more LNG infrastructure will need to be developed. And that’s where Teekay and other LNG players come in.

 

As a shipping company, the MLP’s cash flows depend on traffic, and can take a hit when volume dries up. It mitigates the risk somewhat by leasing all its ships on 15- to 20-year contracts that guarantee it a reasonable return.

 

Typically, the company signs the contract long before the ships have left the shipyard. All are leased to major LNG projects, including new LNG developments in Qatar and Indonesia. Contracts typically include a fixed rate, plus an adjustment to account for cost inflation.

 

Teekay uses its stable contract base to finance the cost of new tanker construction. Even in the current tight credit market, the MLP has several new LNG ships scheduled for delivery over the next few years. That means further bumps to the distributions as these ships start earnings revenues. Teekay recorded a sizeable bounce in distributable cash flow for its most recent quarter. The primary measure of dividend safety and ability to grow rose to $29.6 million from $22.4 million a year earlier. That’s because the LP has been able to keep its tankers in use, as well as bring new ones on line, proof positive its strategy for growth is working.

 

Long term, Teekay LNG should be able to sustain annual distribution growth in the 10 to 15 percent range over the next three years or so. Yielding well over 12 percent, it’s a buy up to 20.