When it comes to stocks that will benefit most from artificial intelligence (AI), the technology sector is at the forefront. However, it is not the only sector that will benefit from this.
Companies in the midstream energy sector are also poised to get a nice boost, as AI training and inference are highly energy-intensive efforts. According to Bank of AmericaElectricity demand for data centers is expected to increase by 10 to 15% annually between now and 2030 and could account for 5% of total global energy demand by 2030.
To meet growing energy needs, utilities and data center operators are increasingly turning to natural gas. This increasing demand for natural gas should in turn lead to more pipeline projects to transport this natural gas to where it is needed.
Let’s take a look at three midstream companies that are very well positioned to benefit from the increasing energy demand driven by AI.
Energy transfer(NYSE:ET) operates one of the largest integrated midstream systems in the US. The system includes nearly 105,000 miles of natural gas pipelines and 235 billion cubic feet (Bcf) of operating storage capacity. Importantly, the company has a strong position in Texas and the Permian Basin, giving it access to some of the cheapest natural gas in the country. The Permian is largely an oil field and due to a shortage of natural gas pipelines, natural gas prices at the nearby Waha hub were negative for several periods in 2024.
Not surprisingly, given Energy Transfer’s strong position in this region, it has received many incoming inquiries about potential natural gas pipeline projects to bring natural gas to both energy producers and potential new data centers. On its last earnings call, the company said it had received requests to connect to about 45 power plants it doesn’t currently serve in 11 states and more than 40 future data centers in 10 states. It noted that many of these power plants and data centers were within two to five kilometers of one of the pipelines. It also said it was seeing increased demand in several of its existing pipelines due to demand for AI data centers.
Meanwhile, in December, Energy Transfer announced a new $2.7 billion project to connect Permian natural gas to other markets to help support the growth of data centers and power plants in Texas. The first phase of the project is expected to come online by the end of 2026.
Partners for business products(NYSE:EPD) is another major midstream operator with a strong position in Texas and the Permian. In fact, most natural gas pipelines and storage facilities are located in Texas or along the Gulf Coast.
On its latest conference call, the company said early signs of power demand driven by AI were “some of the most promising signals [it’s] seen in natural gas in a long time.” It added that while AI energy demand is hot to talk about, it is one of the few companies with the pipeline and storage assets to really take advantage of this opportunity.
It added that it was particularly well positioned to serve the Dallas-Fort Worth and San Antonio areas. It noted that data centers in the Dallas area currently use the fourth most power, but this area is the second in planned power expansion. San Antonio, meanwhile, was seventeenth in power but ninth in projected power.
Meanwhile, Enterprise Products Partners has entered more of a growth phase and is starting to ramp up capital expenditure (capex) given the growth opportunities it sees. After significantly cutting back on capital expenditures during the height of the COVID-19 pandemic, the company plans to increase them to between $3.5 billion and $4 billion this year. Most of these projects are centered around the Permian.
Not every data center in the US will be built in Texas, and Williams Companies(NYSE:WMB) possesses perhaps the most valuable natural gas pipeline system in the US. The Transco Pipeline system spans the Southeast, from New York to southern Texas, bringing natural gas to markets in 13 states. The 10,000-mile system transports 15% of the natural gas in the US
The pipeline plays an important role in transporting natural gas from the Marcellus Shale to markets along the East Coast. The pipeline is so well located that Williams can continually build new projects that connect to its Transco system. Nine Transco expansion projects are planned between the second half of 2024 and 2029.
The Southeast isn’t the only place Williams is active, however, as it has also benefited from the expansion of its MountainWest and Northwest pipelines in the western US. Last quarter, major energy producers in the MountainWest region also said they expect a massive increase in power generation demand due to increased AI workloads.
Energy Transfer, Enterprise Products Partners and Williams all expect strong growth due to increasing demand for natural gas. At the same time, the shares are relatively cheap from a historical perspective. Midstream master limited partnerships (MLPs) traded at an average enterprise value at an EBITDA multiple of 13.7 between 2011 and 2016. Today, MLPs Energy Transfer and Enterprise trade well below that level.
Data per YCharts.
Williams is trading slightly closer to that historical range, but is structured as a business, which tends to command higher valuations.
All three stocks also have solid returns, with Energy Transfer having a forward yield of 6.6%, Enterprise also at 6.6% and Williams at 3.4%.
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Bank of America is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool holds and recommends Bank of America. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Three energy pipeline stocks that will benefit from artificial intelligence (AI) by 2025 were originally published by The Motley Fool
