As this month's cover story suggests, Wall Street is going to see a spate of new upstream master limited partnerships (MLPs) hit the market in the coming months-and there's little argument among analysts that these investment vehicles are likely to draw favorable nods from investors.

Richard Roy, an analyst with Citi in New York, says the investing public will continue to view E&P MLPs as an asset class with great total-return opportunities. He notes that between January 2006 and mid-2007, each of the six upstream MLPs that have gone public have averaged estimated total returns-that's unit-price appreciation plus cash distributions-of about 66.5%.

John Freemen, an analyst with Raymond James & Associates in Houston, agrees. "The U.S. is a mature oil and gas basin, and transitioning assets into MLP-type structures is the logical progression for sustainable value creation."

However, another New York-based market seer, Credit Suisse analyst Sam Arnold, puts his finger on a concern that has been articulated by Richard D. Weber, president of Atlas Energy Resources, an upstream MLP.

Arnold anticipates that by mid-2008, the ranks of such yield-oriented, tax-advantaged entities could swell to 15, with many more poised to IPO in the years to come.

The analyst also believes there's a significant asset base suitable for these partnerships to tap. "We believe some $200 million in U.S. upstream assets could be candidates for an MLP structure," he says. "That's some 25% of the U.S. producing base."

And therein lies the potential problem for both the MLP issuer and the investor. With so many of these upstream partnerships expected to come to market in the next year, "the competition for assets will be heightened, potentially driving up acquisition prices and reducing deal accretion," explains Arnold.

"This appears to be the single-biggest risk to [MLP] unit-price performance."

Weber, more emphatically, views the sole reliance on acquisitions for growth as a flawed strategy.

"As more companies like ourselves jump into the MLP space, competition for the same kinds of assets-long-lived reserves with shallow-decline production-is bound to increase costs...such that it will become increasingly harder to replace production via acquisitions."

As Weber suggests, a more balanced approach is needed to growing production and hence, distributions-specifically one that combines organic growth through the drillbit with acquisitions.

Atlas has, for instance, some 492,000 net undeveloped acres in its asset inventory and plans, between its Appalachian and Antrim shale holdings in Michigan, to drill in excess of 1,000 wells in 2007.

Thus, the company is in effect not merely buying reserves and production, but positioning itself to grow its asset base organically for the long term. Indeed, it has earmarked for 2008 not only $52 million for maintenance capex but another $68 million for growth spending.

Does this mean acquisition-focused upstream MLPs are doomed? Not by a long shot. Today's MLPs are far more prudently managed than their wasting-asset ancestors of more than 20 years ago.

Importantly, they're pursuing in a highly liquid gas-futures market-something not available to partnerships of the 1980s-very aggressive hedging programs that are locking in attractive commodity prices.

They also have set-asides for maintenance capex and typically adhere to a cash-coverage ratio of 1.2 times distributions.

The bigger issue: As the MLP space becomes crowded and drop-down partnerships from larger public E&P companies are forced to vie for reserves in a dwindling universe of assets, will they be able to even sustain-forget about growing-distributions?

At some point-maybe not in the next couple of years-they won't. It's a self-fulfilling prophesy. Very simply, unless they build into their strategy a platform for organic growth to complement growth through acquisitions, they're literally going to start running out of gas.

This one issue doesn't take into account all of the other pitfalls that could beset upstream MLPs: rising interest rates, a slide in commodity prices or adverse tax legislation.

Any combination would also hurt MLP valuations. After all, they have in the past.

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