Fundamentals for midstream MLPs generally appear bullish in 2018. Third-quarter earnings season underscored the extent to which the group has followed Enterprise Products Partners’ lead and sought to limit equity issuance to focus on self-funding growth opportunities.

At the same time, many MLPs have taken their medicine, slashing distributions and shoring up their balance sheets by monetizing noncore assets. This process hasn’t entirely run its course, with Energy Transfer Partners LP (NYSE: ETP) and others still leaning against the winds of change. Contract expirations and dilutive conversions of preferred units will also present challenges for some names in coming years. However, many partnerships have taken the necessary measures to put themselves on a sustainable path.

Besides the prospect of outsized production growth in the Permian Basin and STACK plays, our favorites should also benefit from supportive crude-oil prices and the highest gas-processing margins in years.

This issue of Energy & Income Advisor reviews the headwinds buffeting MLPs, the promise of the new year, trends in mergers and acquisitions, our top picks, pockets of underapprecated risk, and some under-the-radar opportunities. We’ve also updated most of the comments in our MLP Ratings table.

In US dollar terms, the Solactive Canadian Midstream Oil & Gas Index has outperformed the Alerian MLP Index by more than 15 percentage points so far in 2017 and almost 25 percentage points since the energy down-cycle began in mid-2014.

Nine of the 10 Canadian midstream companies in our International Coverage Universe have increased their dividends at least twice since oil prices peaked in 2015. The lone exception, Kinder Morgan Canada (TSX: KML), completed its initial public offering on May 30, 2017.

Equally important, none of these names have cut their payouts since energy prices started to break down in mid-2014—a remarkable feat when you consider the pain that Canadian oil-field service companies and producers have suffered relative to their US peers.

Cross-border transportation constraints, coupled with surging US energy production, have ensured that Canadian upstream operators’ price realizations on crude oil, natural gas and natural gas liquids come at a significant discount to prominent benchmarks.

The group’s outperformance and steadily growing dividends stand in marked contrast to the turmoil afflicting US midstream master limited partnerships (MLP), where many prominent names such as Energy Transfer Partners LP (NYSE: ETP), Plains All-American Pipeline LP (NYSE: PAA) and Williams Partners LP (NYSE: WPZ) have slashed their distributions at least once.

All told, the 25 companies in the Alerian MLP Infrastructure Index have reduced their aggregate quarterly distribution by 14.5 percent from year-ago levels and almost one-third since early 2016. These payout cuts have reduced investors’ income streams and resulted in sharp selloffs in their stock holdings. Even Enterprise Products Partners LP (NYSE: EPD) and other higher-quality names have underperformed, suffering for the sins of their profligate counterparts.

We explore why Canadian midstream stocks have outperformed the Alerian MLP Index and the aspects of their business model that could provide a model for their counterparts south of the border.

With investor confidence in master limited partnerships (MLP) at low ebb, inflows to the group have slowed significantly, reducing the market’s capacity to absorb equity issuance. Many debt-constrained MLPs with higher yields have responded to this challenge by pursuing private placements of preferred units to finance growth projects or asset drop-downs.

A strong balance sheet and excess distribution coverage enabled Enterprise Products Partners LP (NYSE: EPD) to take a slightly different tack: reducing its rate of quarterly distribution increases to retain more cash flow.

With Enterprise Products Partners not getting credit for its consistent growth, management indicated that reducing the rate of distribution increases would put the MLP closer to being able to self-fund the equity portion of its growth capital in 2019—a major point of differentiation. Management asserted that any excess cash flow eventually could be used to buy back stock, depending on the valuation and how this option stacks up relative to other uses of capital.

This announcement from an industry bellwether raised questions about whether the traditional model of pushing the envelope on distribution growth while relying primarily on equity issuance to finance expansion opportunities still makes sense.

Given the pain of the past several years, a focus on building distribution coverage and improving leverage metrics should help to shore up confidence in the group. And any MLP that can grow its per-unit cash flow without leaning heavily on the equity market will have a distinct advantage as competition for volumes intensifies.

Enterprise Products Partners wasn’t necessarily the first MLP to go down this path—Magellan Midstream Partners LP (NYSE: MMP) hasn’t issued equity since 2010—but this announcement has changed the conversation this earnings season, with many partnerships tapping the breaks on distribution growth to build coverage and reduce the need to issue equity.

Thus far, third-quarter results suggest that most of our MLP Portfolio holdings will be able to make this transition with relative ease, though two names with tighter distribution coverage could face more of a slog.

We’ve completed our quarterly update to the ratings and comments in our International Coverage Universe. Key takeaways from this exercise include ongoing cost-cutting, deleveraging and consolidation in Canada. Meanwhile, natural-gas prices in Australia have soared, as the upsurge in exports has limited the supply available to the domestic market.

Against this backdrop, the names in our International Portfolio reported solid second-quarter results and affirmed or increased their guidance. All these stocks benefited from the US dollar’s weakness this summer.

The latter tailwind has made it a good year for our International Portfolio, with the conservative sleeve delivering an average total return of 12.6 percent and the aggressive sleeve up 0.5 percent. Over this period, the S&P 500 Energy Index gave up 8.8 percent of its value.

But solid fundamentals also contributed to these returns; all our conservative holdings increased their dividends at least once this year.