Last year was pretty good, in terms of the performance of the broad master limited partnership (MLP) sectors-pipeline and other midstream, propane distribution, coal, shipping and E&P-and it was especially good for the closed-end funds investing in those MLP sectors.

Looking at 2006 total returns (unit or share-price appreciation plus reinvested cash distributions), the average share price for MLPs was up 29.7% versus the prior year while their average net asset value (NAV) increased 19.9%.

For the five closed-end funds that focus almost exclusively on MLPs-the likes of Tortoise North American Energy Corp. (TYN) and the Fiduciary/Claymore MLP Opportunity Fund (FMO)-returns were even better, with average share prices climbing 34.8% and NAV total returns up 25.6%.

Comparatively, on a total return basis, the S&P 500 Index was up just 15.6% in 2006.

That's great, but in the investment business, past is not necessarily prologue. Therefore, the key question remains: Will such market momentum for energy-related MLPs carry into 2007? The answer, at least from one securities researcher, is a qualified "yes." Translation: The road ahead could get a little bumpy.

"While we still believe the internal fundamental and external forces that shape MLP performance will be favorable this year, the recent volatility in oil and natural gas prices could cool investor interest in the group, resulting in uncertain performance over the short term," says Ronald F. Londe, vice president and co-leader of the natural gas research group for A.G. Edwards & Sons in St. Louis.

However, he points out, this might have a silver lining in that it could result in buying opportunities for those small- to midsize MLPs with visible distribution growth.

"In the meantime, MLP investors will be earning a relatively high current rate of return/yield while waiting for a positive event to change market psychology toward the sector or an event/acquisition that would influence a specific MLP. The most important influence on [MLP] performance should continue to be growth in distributions."

During 2006, distributions for the A.G. Edwards universe of 30-plus MLPs grew an average of 11%. This year, the firm's forecasts indicate that the sector could show an average distribution growth of 13%.

"In our opinion, this distribution growth is highly visible because the majority of the increases in cash flow are derived from grass-roots projects that traditionally have higher returns and lower associated risk compared with acquisitions," the analyst says.

Londe notes that with overall inflation estimates for 2007 in the range of 2% to 2.5%, the relative growth in income derived from MLPs provides investors with a stronger incentive to own such partnerships. It now appears more likely that interest rates could remain benign in 2007-in a range of 4.5% to 5% on the 10-year Treasury note.

"If interest rates remain stable and investors' fears of a spike in interest rates continue to wane, fundamental factors should be the main driver of MLP unit performance this year-with the caveat of uncertainty surrounding trends in oil and gas prices."

With an eye on visible distribution growth, the analyst's main investment focus is the midstream/pipeline sector, followed by propane and coal. Says Londe, "Within the pipeline group, our emphasis would be on the products pipelines and natural gas gatherers and processors."

His Buy ratings in late February included DCP Midstream, Energy Transfer Partners, Enterprise Products, Magellan Midstream Partners, TransMontaigne Partners, Valero LP and Williams Partners.

Notably, most of these MLPs are expected to achieve particularly high, double-digit, distribution growth for 2007 versus last year. For instance, that of Williams Partners this year is estimated to be 43.9%; Energy Transfer Partners, 37%; and DCP Midstream Partners, 25%.

"Meaningful distribution growth should make the MLPs stand out relative to other income-oriented investments," contends the analyst.

During the last three, five and 10 years, A.G. Edwards' MLP universe has averaged total average annual returns of 21.3%, 25.9% and 23%, respectively. Comparatively, the S&P 500 has averaged 10.4%, 7.5% and 10% during the same periods.

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