Beyond UNG: Is This Nat Gas ETF Ready to Soar?

Natural gas enjoyed a nice late-day pop Tuesday after the U.S. Energy Information Administration cut its 2012 production outlook for the clean-burning fuel while dramatically increasing its demand forecast. The EIA now sees a 2012 natural gas production increase of 2.9 billion cubic feet per day, or 4.4%, to 69.14 billion cubic feet per day. That's still a record, but it's also below EIA's April forecast that estimated output of 69.22 billion feet per day. Demand is expected to climb to 3.4 Bcfd, or 5.1%, from 2011 to 70.17 Bcf daily. EIA's previous estimate showed total demand in 2012 averaging 69.6 Bcfd, according to Upstream Online. The news comes on the heels of a government report issued last month that showed U.S. natural gas output declined in February for just the second time in a year. Predictably, today's EIA news sent the embattled U.S. Natural Gas Fund UNG soaring. In late trading, UNG is higher by almost 5% on volume that is roughly a third above the daily average. UNG, which tracks NYMEX-traded natural gas futures, is now trading above its 50-day moving average for the first time in 10 months. Those are encouraging signs for UNG to be sure, but traders and investors that prefer equities to futures would do well to consider the First Trust ISE-Revere Natural Gas Index Fund FCG. FCG was trading lower before the EIA news hit the wires and while the gain FCG is sporting as of this writing is modest, volume in the ETF has topped the daily average. FCG does hold long term promise for patient investors. It can also be said the ETF's name is deceiving and explains why the fund is down over 22% in the past year. FCG, which has over $362 million in assets under management, is home to 29 stocks. Yes, many of FCG's are major natural gas players across various U.S. shale plays. While no holding exceeds a weighting of 4.39%, FCG has been treated as more of a gas than oil play. The other side of the coin is that FCG holdings such as Cabot Oil & Gas COG, EOG Resources EOG, Devon Energy DVN are working to boost their oil production. Not to mention, FCG offers some exposure to oilier names such as Anadarko Petroleum APC and Apache APA. As an added bonus, FCG is home to several credible acquisition targets such as Range Resources. FCG's number of potential takeover plays grows by stretching things out a bit and viewing Anadarko and Chesapeake Energy CHK as possible targets as well. Bottom line: We reiterate the view that FCG's combined oil/natural gas exposure coupled with the possibility of an uptick in energy sector M&A activity makes the fund the superior equity-based natural gas play at this juncture. For more on natural gas ETFs, please click HERE.