Sentiment continues to drive the stock market. That makes for fickle rallies and a lot of volatility along the way, even for the most reliable of investments, such as our energy master limited partnerships (MLP).

Ultimately, however, these ups and downs will be insignificant to returns from our favorites. And as long as investors don’t shoot themselves in the foot with flawed “risk-avoidance” strategies like trailing stop-losses–or by chasing recommendations above recommended buy prices–they’ll continue to see both their capital and income streams grow.

The key is cash flow. MLPs are set up to deliver cash to investors as distributions without paying corporate taxes. As a result, the yield is the most important factor setting share prices and therefore determining returns. The crash of 2008 and May’s Flash Crash proved that dividend safety doesn’t necessarily prevent jagged price volatility. But high-quality MLPs’ rapid recovery from both debacles also proves that as long as distributions are steady, unit prices will recover fully.

As long as the underlying business is healthy enough to support the payout–and preferably increase it–the cash will continue to flow. And over time a rising distribution will take the MLP’s unit price higher with it, almost no matter what happens in the broader market.

Our task as investors is to ensure the underlying businesses of our holdings stay healthy. And there’s no better time to do that than during earnings season. In the most recent installment of MLPP Elliott Gue covered the super-charged second-quarter results at Enterprise Products Partners LP (NYSE: EPD) and Kinder Morgan Energy Partners LP (NYSE: KMP), both of which also boosted distributions. Since then four more of our favorite MLPs have released their numbers, and the upshot is no less satisfying.

Conservative Holding Sunoco Logistics Partners LP (NYSE: SXL) backed up its 21st consecutive quarterly distribution increase–a 9.6 percent year-over-year boost–with steady distributable cash flow. Management also announced it has exercised rights to increase ownership interests in three pipelines, all of which will be immediately accretive to earnings. Along with last month’s purchase of Texon Petroleum’s butane blending business, the course is set for solid future growth as well.

Like our other Conservative Holdings, Sunoco is primarily a fee-based operation. Earnings are affected by the oil contango’s behavior. But over time cash flow and distributions are driven by continued asset additions and expansion, such as joint venture projects with MarkWest Energy Partners LP (NYSE: MWE) in the growing Marcellus shale region.

Operating income in the refined products pipeline system rose nearly 20 percent in the second quarter from year-earlier levels, despite increased costs due to environmental remediation and the permanent shutdown of parent Sunoco’s (NYSE: SUN) Eagle Point refinery. Terminal facilities income rose 31.6 percent from 2009 levels on the addition of capacity and well as strong performance at the Nederland facility.

One-time factors did hurt income at the oil pipeline segment. But the overall result was superb distribution coverage of 1.18-to-1, supporting both the current level and holding the door open to further increases as well. Acquisitions and an improvement in contango profits promise to lift cash flow in the second half of the year.

Buy on rumor of great earnings news and sell when it appears: That’s been the rule for our MLP Profits recommendations to report so far, and it was true of Sunoco Logistics this week. Nonetheless, its units still trade well above our current buy target of 68.

Given these results, the distribution increase and the announced acquisitions, we’re taking the buy target for Sunoco Logistics Partners LP up to 70. That’s still well below Sunoco’s current level. But given this emotional and volatile market, we believe that level likely to be reached again for those yet to take a position. If you’re in Sunoco Logistics Partners, stick with it.

Three Aggressive Holdings also came in with strong results. Oil and gas producer Linn Energy LLC (NSDQ: LINE) revealed its growing strength in mid-July, making yet another acquisition of long-life reserves in Texas with current daily production of 900 barrels of oil equivalent. The reserves have an estimated life of more than 25 years based on current decline rates, and so fit well with Linn’s current plans.

Such asset additions ensure solid future results. Meanwhile, second quarter cash flow pushed up the distribution coverage ratio to 1.2-to-1. That’s versus prior mid-point guidance from management of just 1.06-to-1. One reason was average daily production, which was 6.7 percent above mid-point guidance thanks to efficient development and property acquisitions. Another was a 14.1 percent reduction in operating expenses per unit of output.

Linn has closed some $1 billion in acquisitions thus far in 2010, mostly in the Permian Basin but also in northern Michigan. And the Granite Wash property is ramping up production and reserve growth ahead of expectations as well. Some 40 percent of the acquisitions’ current reserves are oil and natural gas liquids, which should eliminate some of the uncertainty surrounding Linn as it renews pricing hedges. Reserve life is now well over 20 years and there’s abundant room for new finds, thanks to a large undeveloped land position.

Linn units have been all over the map in recent months, actually hitting a low of $12.60 per unit on May 6, but have generally trended higher. Now above 30, they’re considerably above our buy target of 28. Eventually, Linn should head a lot higher, particularly if natural gas prices can revive. For now, however, the units are barely priced to yield 8 percent. If you own Linn Energy LLC, stick to it. If you don’t yet, let’s be patient and try to let the price come back to us.

Navios Maritime Partners LP (NYSE: NMM) boosted its distribution for the fourth consecutive quarter, riding a 61.8 percent boost in quarterly cash flow over last year’s results and a 50 percent jump in revenue. That was in large part due to continued successful contracting of the company’s fleet of dry-bulk ships. And management was also successful adding assets, with the acquisition of Navios Pollux boosting the average charter coverage of the fleet to 4.4 years and cutting the average age to just 5.7 years.

Navios’ cash flow and revenue depend heavily on rates for dry bulk shipping, which are notoriously volatile. Management, however, has factored out much of the impact on unitholders, contracting out 100 percent of shipping capacity in 2010, 92.9 percent for 2011 and 88.3 percent for 2012. And the average contractual daily charter out rate is slated to rise in all three years.

Second-quarter operating surplus–a key measure of the ability to expand, meet maintenance costs and pay distributions–hit $34.4 million in the quarter. That was more than triple year ago levels and bodes very well for future distribution strength and growth.

Conservative financial and operating policies like these are a major point of separation between Navios and other high-yielding shipping companies. And because it’s not technically organized as a US MLP, there are no K-1s to file for unitholders.

Still below our buy target of 20, Navios Maritime Partners LP is a strong buy for those who don’t already own it.

Penn Virginia GP Holdings LP’s (NYSE: PVG) chief asset–Penn Virginia Resource Partners LP (NYSE: PVR)–enjoyed a sharp increase in second-quarter net income. That was in large part thanks to increased value of derivatives used to lock in prices for the coal sold from its lands under royalty agreements. Coal production from the LP’s lands also rose slightly to 8.9 million tons.

Midstream gross margin showed another solid gain to 85 cents per thousand cubic feet natural gas throughput from 67 cents a year ago. That was offset by a 6.7 percent drop in volumes, as well as costs of separating Penn Virginia Resources from its former parent Penn Virginia Corp (NYSE: PVA). The latter will be a major plus for Penn Virginia GP Holdings and Penn Virginia Resource Partners unitholders going forward, as they earn a larger share of the profits from the midstream assets.

Cash used to complete the separation, settle derivatives and pay for a one-time boost in maintenance capital costs depressed distributable cash flow about 13 percent. Management, however, still stuck to guidance and affirmed the second half will be better than the first.

There was no distribution increase, and the coverage ratio was only 0.97-to-1. But sound margins for both the midstream and coal-mining royalty businesses point toward sharp improvement going forward. As a general partner, Penn Virginia GP Holdings is essentially an aggressive bet on Penn Virginia Resource Partners fortunes. We’re still buyers of Penn Virginia GP Holdings LP whenever the price is less than 20, as it is now.

Here are second-quarter reporting dates for the rest of the MLP Profits Portfolio. We’ll be recapping the numbers as they appear.

Conservative Holdings

• Genesis Energy Partners (NYSE: GEL)–August 5
• Magellan Midstream Partners (NYSE: MMP)–August 3
• Spectra Energy Partners (NYSE: SEP)–August 5

Growth Holdings

• DCP Midstream Partners LP (NYSE: DPM)–August 5
• Energy Transfer Partners LP (NYSE: ETP)–August 9
• Inergy LP (NSDQ: NRGY)–August 9
• Kayne Anderson Energy Total Return Fund (NYSE: KYE)–N/A
• Targa Resources Partners LP (NSDQ: NGLS)–August 5
• Teekay LNG Partners LP (NYSE: TGP)–September 3 (estimated)

Aggressive Holdings

• Encore Energy Partners LP (NYSE: ENP)–August 5
• EV Energy Partners LP (NSDQ: EVEP)–August 10 (estimated)
• Legacy Reserves LP (NSDQ: LGCY)–August 4
• Regency Energy Partners LP (NSDQ: RGNC)–August 9

Taxing Questions

As far as dealing with major issues goes, Congress appears deadlocked until November elections. Nonetheless, the rumor mill is still working overtime regarding everything from prospective regulations to new taxes. And based on conversations Elliott and I have had with many of you, MLPs’ status is a frequent subject.

To repeat, the only action that’s taken place so far affecting MLPs is the passage of restrictions on carried interest by the US House of Representatives. This measure has yet to be taken up by the Senate. Should it pass muster, however, this version has nothing to threaten the status of MLP Profits recommendations.

This bill as it stands would treat any income received by a publicly traded partnership with respect to “investment services partnership interests” (ISPI) as non-qualifying income for purposes of meeting rules applicable to publicly traded partnerships. That basically means any MLPs relying on this carried interest would be taxed differently than they are now, possibly forcing management to cut or even gut distributions to absorb the new taxes.

However, this doesn’t apply to the “natural resources” category of qualifying income, upon which most MLPs principally rely. In other words, income from the following is exempt: exploration, development, mining, or production, processing, refining, transportation (including pipelines transporting gas, oil or products thereof) or the marketing of any mineral or natural resource (including fertilizer, geothermal energy and timber) or industrial source carbon dioxide, or the transportation or storage of certain alternative fuels, including any gain from the sale or disposition of a capital asset held for the production of such income or property used in such a trade or business.

The bill also exempts general partners from carried interest taxation by carving out an exception for partnerships substantially all of whose assets consist of interests in one or more publicly traded partnerships and substantially all of whose income consists of ordinary income or sales of property used in a trade or business (i.e., the typical general partner MLP).

Tax rates and penalties are fairly punitive. But again, none of them affect in any way, shape or form the energy-focused MLPs in the MLPP Portfolio. They do potentially impact the financial MLPs we’ve been warning you against since our very first issue. All are rated sells in How They Rate. Get out while you still can at decent prices.