When it comes to looking at stocks that will benefit the most from artificial intelligence (AI), the technology sector is front and center. However, it is not the only sector set to benefit.
Companies in the energy midstream space are also poised to get a nice boost because AI training and inference are very energy-intensive endeavors. According to Bank of America, electricity demand for data centers is forecast to rise between 10% to 15% a year between now and 2030 and could make up 5% of all worldwide power demand in 2030.
In order to meet growing power needs, utility companies and data center operators are increasingly turning to natural gas. This increasing natural gas demand in turn should lead to more pipeline projects to transport this natural gas to where it is needed.
Let's look at three midstream companies that are very well-positioned to take advantage of the increasing power demands stemming from AI.
Energy Transfer
Energy Transfer (ET 1.23%) operates one of the largest integrated midstream systems in the U.S. The system includes nearly 107,000 miles of natural gas pipelines and 235 billion cubic feet (Bcf) of working 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 takeaway pipelines, prices of natural gas at the nearby Waha hub were negative for a number of stretches during 2024.
Not surprisingly given Energy Transfer's strong position in this region, it has been receiving a lot of inbound inquiries surrounding potential natural gas pipeline projects to bring natural gas to both power producers and potential new data centers. On its last earnings call, the company said it's had requests to connect to about 45 power plants that it does not currently serve in 11 states and more than 40 prospective data centers in 10 states. It noted that many of these power plants and data centers were within two to three miles of one of its pipelines. It also said it was seeing increased demand across several of its existing pipelines due to AI data center demand.
In December, meanwhile, Energy Transfer announced a new $2.7 billion project to connect Permian natural gas to other markets to help support data center and power plant growth in Texas. The first phase of the project is expected to come online by the end of 2026.
Enterprise Products Partners
Enterprise Products Partners (EPD 1.60%) is another large midstream operator with a strong position in Texas and the Permian. In fact, most of its natural gas pipeline and storage assets are in Texas or along the Gulf Coast.
On its last conference call, the company said the early signs of power demand stemming from AI "were some most promising signals [it's] seen in natural gas in a long time." It added that while power demand from AI is popular 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 Dallas area data centers were consuming the fourth most power today, but that the area was the second for planned power expansion. San Antonio, meanwhile, was seventeenth in power, but ninth in planned power.
Meanwhile, Enterprise Products Partners has entered more of a growth phase, beginning to ramp up capital expenditures (capex) given the growth opportunities it is seeing. After significantly cutting back on capex during the height of the COVID-19 pandemic, the company plans to ramp it up to between $3.5 billion and $4 billion this year. Most of these projects are centered around the Permian.
Image source: Getty Images.
Williams Companies
Not every data center in the U.S. is going to be built in Texas, and Williams Companies (WMB 1.51%) owns arguably the most valuable natural gas pipeline system in the U.S. Its Transco Pipeline system spans the Southeast going 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 U.S.
The pipeline plays a major role in transporting natural gas from the Marcellus Shale to markets along the East Coast. The pipeline is so well situated that Williams is consistently able to build new projects connecting to its Transco system. In fact, between the second half of 2024 and 2029, it has nine Transco expansion projects scheduled.
The Southeast isn't the only place where Williams is active, though, as it has also been benefiting in the western U.S. with expansion of its MountainWest and Northwest Pipelines. Last quarter, it said the large power generators in the MountainWest region were expecting huge increases in power generation demand due to increased AI workloads, as well.
Cheap stocks
Energy Transfer, Enterprise Products Partners, and Williams all have strong growth ahead from increasing natural gas demand. At the same time, the stocks are relatively cheap on a historical basis. Midstream master limited partnerships (MLPs) traded at an average enterprise value to EBITDA multiple of 13.7 between 2011 and 2016. Today, MLPs Energy Transfer and Enterprise trade well below that level.
Data by YCharts.
Williams trades a bit closer to that historical range but it is structured as a corporation, which tends to command higher valuations.
All three stocks also have solid yields, with Energy Transfer having a 6.6% forward yield, Enterprise also 6.6%, and Williams 3.4%.
