One reason some analysts and portfolio managers like energy MLPs is because their cash flow comes from fee-based businesses, such as the delivery of oil and natural gas through pipelines. Because they are delivering products rather than exploring for them, their distributions tend to be more stable than those of royalty trusts and aren't affected much by fluctuations in energy prices. A short reserve life of the oil and gas fields that generate cash for a royalty trust often means distributions won't last very long. On the other hand, at least one well-known energy analyst thinks royalty trusts and other energy investments are better bets than MLPs, many of which he believes are poised for problems because of high debt and payments to general partners.

Gerald Kaminsky, managing director of The Kaminsky Group at Neuberger Berman LLC, has achieved strong results investing in MLPs. "The safety of the businesses that comprise a given MLP is the critical criteria for us making an investment," Kaminsky says. "There are many businesses in the MLP mold. Each of these has different risk characteristics. We have looked at MLPs and invested where the client objectives are capital safety, high current income and preferably tax advantaged. We've incorporated both the MLPs and the management companies of some in different pools of assets where appropriate."

He thinks the fundamentals of many MLPs make them attractive. "Pipelines are long-lived assets, without significant technological risk of obsolescence. As you look at the annual reports and financial reports, it's clear they generate a lot of cash. Some have been able to grow organically and by acquisition. There are many reasons organic growth will continue based on the underlying demand for energy in this country and based on the economies of scale as you put more products or revenues through a fixed-cost type of business."

Kaminsky adds his firm has considered royalty trusts, but has not invested in them, primarily because their distributions aren't as stable as those of MLPs. Distributions of royalty trusts can rise and fall with oil and gas production and prices, he notes. "There's more volatility. They have commodity risks that MLPs profess not to have or mitigate," he says.

Some of Neuberger Berman's significant MLP holdings include Enbridge Energy Partners, GulfTerra Energy Partners, Kinder Morgan Energy Partners and TEPPCO Partners.

AG Edwards Senior MLP analyst Ron Londe follows oil and gas pipeline MLPs, as well as those involved in propane and coal.

"Basically the MLPs are just like corporates [corporate bonds], and we analyze them just like corporates, but they are taxed like partnerships and their reason for being is to generate as much cash flow to the unitholder as they can. So we key in on distributable cash flow, and look at the competitive situation in the group they're in, the coverage for the distribution and the balance sheet numbers. We look at the growth potential from acquisitions and expansions and their businesses. We look at their valuation relative to their peer group. We look at the ten-year Treasury note rate and the premium MLPs are offering. The premium over the long term is 300 basis points. We also try to gauge coverage distribution relative to their peer group," Londe says.

He adds an MLP investor should diversify his or her holdings. In the oil and natural gas sector, he likes Plains All American Pipeline, TEPPCO and MarkWest. "Here again they have good records of growing distributions and good coverage. They have balance sheets that are strong and the flexibility to make acquisitions," he says.

The MLPs in the propane business he likes are Inergy and Heritage Propane Partners. In coal, he likes Alliance Resource Partners and Penn Virginia Resource Partners.

Widely respected independent energy analyst Kurt H. Wulff takes a dimmer view of many MLPs. "Their basic business is more stable and they're not as affected by swings in commodity prices, but that stability is partly offset by greater leverage and further by the free ride the general partners gets. So when you put all together, they are not a particularly safe investment," he comments.