The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Adam Fischbaum

NEW YORK ( StreetAuthority) -- Back in April, I wrote a piece about taking profits on some of the energy master limited partnerships or MLPs.

How have things turned out since? Two of the names I discussed, Kinder Morgan Energy ( KMP) and Navios Maritime Partners ( NMM) are textbook examples of how bipolar markets can be. Kinder Morgan is slightly up (exclusive of income) by about 4%, while Navios has lost almost 27%. Even with the yield, investors are still behind the eight ball.

But how have energy MLP's as a whole performed this year? Again, it's, at best, a mixed bag.

The best benchmark for energy MLP's is the Alerian MLP Index ( AMZ). From the index high shortly after publication to the present, the index is off less than 4%. Not a big deal. But in early August, the Alerian MLP Index was off more than 19% from the same level.

Many widely held MLP names, such as the aforementioned KMP and perennial investor favorite ONEOK Partners ( OKS), have held their ground or appreciated nicely. So while some value was created briefly during the white-knuckled summer the markets experienced, it would appear that things have returned to normal in MLP land. Are there any opportunities? Yes, especially in the much-hated coal fields and the nation's seemingly limitless natural gas supply.

Opportunity in Coal

There's plenty of coal in the United States. It's cheap, and we've been using it for centuries. But it's dirty. As an energy source, however, it's not going away tomorrow.

While many energy MLP prices have held steady most of this year, many of the coal MLPs have been banged up like a screen door in a hurricane. Coal prices have been cut nearly in half since their 2008 peak spot price of about $150 a ton. Since then, prices have been wallowing at the $80 level this year.

It's funny. I've always noticed that MLP price volatility mirrors price volatility of the commodity stored or transported, especially the oil pipeline and storage companies. Ironically, the actual price of oil has little to do with the revenue of the MLP. The pipeline guys are basically a railroad. They get paid to move the product. Granted, demand will affect the volume of stuff they have to transport, but the price of the product really shouldn't matter much. But stock prices are not rational beings.

Anyway, I smell an opportunity in coal. Many investors seem to be avoiding it -- all the more reason to look at it. In the coal MLP space, Natural Resource Partners, LP ( NRP - Get Report) is a compelling idea. The company owns and manages domestic coal reserves in Appalachia, the Illinois Basin and the Powder River Basin. Rather than owning and operating coal mines and producing its own coal, Natural Resource Partners leases its properties and reserves to mine operators in return for royalty payments. All leases are long-term, and the company has more than 2 billion tons of reserves.

Units are trading at around $26.50, which is a 25% discount to their 52-week high and are yielding 8.3% (the term for an ownership stake in MLPs is "units," rather than "shares"). The attraction to Natural Resource Partners is the lack of exposure to the direct risks of mine operation (remember Massey Energy?). The income stream also appears more stable, thanks to its royalty collection model.

Natural Gas

StreetAuthority's energy expert Nathan Slaughter, however, is a much bigger fan of natural gas. Natural gas has a much cleaner perception and is just as abundant if not more so than coal. The problem with natty gas is that the huge supply has kept prices in the basement. Also as an industry group, it remains very fragmented. Many natural-gas distributors and producers are still independent. This makes it difficult to get the kind of true political traction required to gain any significant policy shift.

But that doesn't mean there's not money to be made.

And while coal may be the stepchild of the energy world, natural gas is the consistently underachieving middle child. Natural-gas prices have floundered in a sub-$5 per cubic foot channel for the better part of a year. At the same time, natural gas extraction technology continues to become more and more cost efficient, allowing producers to pull more and more of it out of the ground cheaply.

Supply isn't a problem. Demand is. Natural gas demand is anemic at best: yet another energy head scratcher. Natty gas is clean, cheap and abundant. Real abundant. We should be using it to power our homes, keep us warm and drive our cars. (In fact, Nathan thinks this may happen soon enough.)

One stock I like is Niska Gas Storage Partners ( NKA). Niska is the largest independent owner and operator of natural-gas storage in North America. In total, the company has about 185.5 billion cubic feet of storage capacity. It's only using 55% of that.

Needless to say, the stock's fundamentals aren't the greatest. But the story behind owning this stock is the valuation. Units trade around $9.37 and yield better than 14%. They're also priced at a 27% discount to their book value.

Analysts estimate the market has placed a value on Niska's storage at just $7 million per billion cubic feet, which is less than half of the current market cost to build new storage. The biggest concern surrounding the company was that due to the soft operating environment, the dividend distribution was at risk.

However, the company has taken necessary steps to protect the payout to common unit holders by repurchasing $62 million of debt this year. The company is also in the process of monetizing $200 million worth of its current natural-gas inventory. Thanks to these maneuvers, Credit Suisse analyst Yves Siegel projects Niska will have enough cash to cover the current distribution to common unit holders for the next year and a half. When the operating environment improves, the company will be well positioned due to its size.

nit holders shouldn't expect distribution increases any time soon, but a 14% yield and a unit price below tangible value is a decent-enough incentive.

Risks to consider: In researching this article, this five-year chart of the Alerian index concerned me.

While I'm not a wiggle reader by trade, this is self explanatory, thus confirming why the energy MLP space made me nervous in the first place. Focusing on names that have already been beaten down is a good way to play defense.

Another risk consideration is uncertainty concerning U.S. tax policy. The potential change in the tax treatment of pass-through entities such as MLPs could negatively affect distributions available to unitholders. Widespread economic slowdown would also compound the pullback in commodity prices, which in turn would affect energy MLP prices.

Action to Take. After a mostly sideways year with lots of volatility in between, I'm still somewhat bearish on energy MLPs as a whole. That said, the volatility has created the opportunity for some selective nibbling in particularly beaten-down areas. Natural Resource Partners and Niska Gas Storage Partners are intriguing ideas: NRP for stability and predictability of its income, thanks to a limited-risk business model; and NKA for its higher yield and deep asset-value characteristics.

>>To see these stocks in action, visit the 2 Energy MLPs With Attractive Yields portfolio on Stockpickr.

P.S. -- We recently came across an unusual energy stock that has crushed gold, silver, oil and just about anything else you can think of over the past 10 years. What's amazing is that even after its 2,000% run-up it's STILL paying an 8.6% dividend yield right now. Click here to get the name of this stock.)

Disclosure: Neither A. Fischbaum nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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  • This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.