There exists a small, interesting, little understood, and sometimes very profitable sector of the MLP space. This group consists of the master limited partnerships that pay variable distributions based on quarterly profit results. These partnerships have both variable raw material costs and variable pricing for the products they sell. The partnerships are set up to pay out 100% of the free cash flow each quarter as distributions to unit holders.

The variable pay MLPs own and operate crude oil refineries, fertilizer plants and chemical plants. The plants use energy products such as crude oil and natural gas as the raw materials needed to produce the refined fuels, fertilizers or chemicals that are then sold into the wholesale or end user markets. The profit margin earned depends on the price paid for the raw materials compared to the current prices for the produced products. For example, most investors are familiar with crude oil prices, which a refinery turns into gasoline, diesel fuel, heating fuel, and other refined products. If oil is relatively cheap and fuel prices are high, the refinery can be very profitable. However, there are other times when a refinery will not be able to sell fuels at a price that covers the cost of the current value for crude oil. The variable pay MLPs also own just one or two facilities, so a planned or unplanned period of down time will also hurt the bottom line profits for the quarter.

Investing in variable rate MLPs involves working with the facts that the quarterly distributions will vary by significant amounts and it is hard to predict what the next quarter will bring, profits wise. However, the savvy and patient investor who understands these partnerships will find periods when he can buy in to earn a 10% or better yield and also pick up 20% or more in unit price increases. Investors and the market will push up the price of a variable MLP after an especially large distribution is announced and push down the price when a small or even zero distribution is paid for a quarter. You need to be ready to buy when the news is bad and the distributions and yields are low. Spend some time to understand how the business of a particular MLP works and then watch the unit price and quarterly distributions to learn what happens when input and output price change and the resulting quarterly distribution. Investing in these MLPs can take patience, because the really good buying opportunities may come up just once or twice a year.  From that point you can use a buy-and-hold strategy to earn a higher average yield due to your low cost basis, or trade out and in as you see patterns in the unit prices. Here are three variable MLPs from different sectors that deserve spots on your watch list.

Terra Nitrogen Company LP (NYSE: TNH) operates one of the countries largest fertilizer plants that turns natural gas into nitrogen based fertilizers. Over the last 5 years, the TNH quarterly distribution has ranged from $1.25 to $4.84 per unit. The unit price has been as low as $68 and as high as $292. The best market for TNH is for natural gas prices to be low and corn and wheat prices to be high. When grain prices are up farmers are willing to pay more for fertilizer and fertilizer producers are happy to oblige with higher prices. Gas is cheap right now, but so are grain prices. However, farming is a very seasonal business and if you think corn and wheat are poised to rise so will the TNH distributions and unit price. In almost any market, TNH is a buy in the low $100's and it is getting close to that level.

CVR Refining LP (NYSE: CVRR) owns and operates two refineries in Kansas and Oklahoma. Since its January 2013 IPO, the CVRR distribution has ranged from $0.30 to $1.58, with the potential to be around $1.00 in the current crude and fuels pricing conditions. One of the CVRR refineries was down for most of July, so the soon to be announced distribution may be less than market expectations, leading to a sell off after the next distribution announcement and an opportunity to buy CVRR on the cheap. Look to buy in at less than $21.50.

OCI Partners LP (NYSE: OCIP) owns a facility on the Texas Gulf Coast that produces methanol and ammonia with natural gas as the primary feedstock. The low U.S. natural gas prices makes OCIP compared to the global methanol and ammonia market. This MLP has only been public for a year, so a distributions and price pattern has not yet formed. Based on the few distributions paid to date, buying in at less than $20 should result in a 10%+ yield on investment.