A Natural Gas Infrastructure Play

The J.P. Morgan Alerian MLP ETN, which focuses on companies that are involved in storage and transportation of natural gas, is back to its all-time highs and moving higher.
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NEW YORK (TheStreet) -- Natural gas prices are headed south once again and U.S. Natural Gas (UNG) - Get Report is leading the downward spiral. One, though, shouldn't give up on the natural gas sector just yet.

Natural gas prices bottomed out a few months ago before starting a small rally in late May. A slow and steady economic recovery helped support the hopes that natural gas prices could finally be ready to turn higher. From bottom to top, the move was impressive, amounting to upwards of 25% gains for UNG.

But the rally topped out in June, and prices are now heading back towards the 2010 low. Thus far, hurricane season has been mild, while inventories remain well stocked. Over the past 16 months, inventory levels have been at the top of the 5-year range nearly the entire time.

As UNG and natural gas prices advanced, it lifted natural gas stocks and

First Trust ISE-Revere Natural Gas

(FCG) - Get Report

, since the move in natural gas prices occurred during a respite in the correction. From May 24 to June 15, UNG gained 26.5% while FCG gained 16.7%, beating the

SPDR S&P 500

's

(SPY) - Get Report

return of 4%.

That outperformance transitioned into underperformance once natural gas prices and stock prices dipped. SPY gained just over 1% between June 15 and August 9, but FCG lost nearly 8% as UNG plummeted 17%.

Over the past year, FCG has kept pace with SPY as the rebound in stocks offset the drag of lower natural gas prices. Occasional rallies in UNG have lifted FCG, as we saw in June, but the eventual slide has always brought FCG back to Earth.

Looking forward, there's no reason this has to end soon, but eventually it will. One indicator of this is Master Limited Partnerships' performance in the market. The

J.P. Morgan Alerian MLP ETN

(AMJ) - Get Report

has been marching higher since inception in April 2009. Shares corrected during May, but while SPY and FCG were dropping to new lows in early July, AMJ was already back to its all-time highs and continues to push skyward into August.

The master limited partnerships are heavily involved in the storage and transportation of natural gas and crude oil, in addition to some companies with operations in exploration and production.

As I

argued last year

, these companies are a good way to play low natural gas prices because of the inverse relationship between volume and price levels. Even with low natural gas prices, increases in volume are good for the pipeline firms. The strategy has borne out over the past year, helped along by the generous yields offered by these firms.

Over the past year companies have also expanded their pipelines.

Regency Energy Partners LP

(RGNC)

was the latest firm to complete a pipeline expansion.

Chesapeake Energy

(CHK) - Get Report

recently sold part of

Chesapeake Midstream Partners

(CHKM)

to the public, using the capital to buy more infrastructure assets. Dan Dicker covered this deal and one by

Anadarko Petroleum

(APC) - Get Report

in a

recent article

on TheStreet.

For now, the MLPs have the momentum. With healthy yields and steady price appreciation, these companies are benefiting from the low-yield environment while avoiding harm associated with the low price of natural gas.

Looking at the long-term development of the industry, the building of natural gas infrastructure is not a make-work stimulus project spending federal dollars. It is the private capital of energy companies that anticipate increased demand for natural gas.

Low prices alone will eventually lead to greater demand by business and consumers, with or without any help from the government. Should the government make it easier to switch to natural gas fuels for transportation, for example, demand will increase even more.

Eventually, that increase in demand will push prices up, and with it, the shares of companies involved in the exploration and production of natural gas because right now, these firms are priced based on the low price of natural gas. When the stock market or natural gas prices drag an ETF such as FCG downward, long-term investors should take the opportunity to pick up shares.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was not long any of the equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.