Energy consumption has started to rise, in part thanks to the increased use of artificial intelligence (AI) applications. AI training and inference put computer servers through their paces and are very energy-intensive. As AI models advance, the need for computing power and the energy needed to supply it are also increasing. To help fulfill that increased energy consumption, electricity suppliers are turning to natural gas to provide it.
One sector that looks set to benefit from this trend is pipeline operators that transport natural gas. Let’s look at four pipeline stocks that look like no-brainer buys in this energy-hungry environment.
Williams Companies (NYSE: WMB) is a leader in natural gas infrastructure and owns what is arguably the most valuable natural gas pipeline in the country: Transco. This pipeline transports natural gas from Appalachia, home of the prolific Marcellus and Utica basins, to energy demand centers in the Southeast and Gulf Coast, which also happens to be the country’s liquified natural gas (LNG) transport hub.
With Transco, Williams is well positioned to benefit from both increasing power demand stemming from data centers as well as any increased LNG demand. In addition, the pipeline is so well situated that there were nine expansion projects linked to Transco with in-service dates beginning in the second half of 2024 and going out to 2029. This is a pipeline that just keeps giving.
The company is looking for 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA) to be between $7.2 billion and $7.6 billion, up from a range of $7 billion to $7.15 billion in 2024. It then expects to grow its EBITDA at a more than 7% compound annual growth rate over the next five years thereafter.
Kinder Morgan (NYSE: KMI) has the largest natural gas pipeline systems in the U.S. stretching 66,000 miles and helping transport about 40% of the natural gas produced in the country. Meanwhile, nearly 90% of its natural gas pipeline contracts are “take or pay,” which means it gets paid whether customers use their pipeline capacity or not. Overall, about 64% of the company’s adjusted EBITDA comes from services related to natural gas.
Given Kinder’s large natural gas system, it should be little surprise that the company is starting to see more natural gas project opportunities. On its last earnings conference call, management said it has “never seen a macro environment so rich with opportunities for incremental build-out of natural gas infrastructure,” crediting the data center buildout, LNG export demand, and natural gas exports to Mexico for its outlook.
The midstream company, meanwhile, has a few large projects underway to help power growth in the upcoming years. This includes expanding its GCX system in Texas to transport associated natural gas out of the Permian and its $3 billion South System Expansion 4 project to help address increasing power needs in the southeast. Overall, it has $4.2 billion of natural gas projects in its backlog, and pipeline utilization and contract terms have been improving in recent years.
Currently, Kinder is looking to grow its adjusted EBITDA by 4% in 2025 and adjusted earnings per share (EPS) by 8%.
One of the most consistent and conservative players in the midstream space, Enterprise Products Partners (NYSE: EPD) has just started to ramp up its growth projects given the increasing demand it is seeing. After dropping its growth capital expenditures (capex) to $1.6 billion in 2022, it will spend between $3.5 billion and $3.75 billion this year and then increase that to between $3.5 billion and $4 billion next year. The company currently has $6.9 billion in projects under construction.
Meanwhile, Enterprise is bullish on the AI data center opportunity in front of it, saying it is “one of the most promising signals we’ve seen in natural gas in a long time, and we’re looking forward to serving this new influx of demand.” It says it is receiving a lot of inbound calls related to new natural gas demand in Texas from both data centers and new gas-fired power plants. It added that it thinks it is one of the few midstream companies with the pipeline and storage assets to really take advantage of this opportunity.
In addition to the natural gas opportunity in front of it, Enterprise currently sports a 6.6% forward yield and has grown its distribution for 26 straight years. This is a great time to add one of the most consistent performers in the midstream space as it ramps up its growth spending.
With a large integrated midstream system and a strong position in the Permian, giving it access to some of the cheapest natural gas in the country, Energy Transfer (NYSE: ET) is among the best-positioned midstream companies to benefit from increasing natural gas demand related to the AI and data center buildout.
On its last earnings call, the company touted that it was already seeing increased power demand from AI and data centers across several of its pipelines while noting numerous incoming requests from both power plants and prospective data centers that could consume a combined 16 billion cubic feet (BCF) a day. Meanwhile, the company announced earlier this month that it was going forward with a new $2.7 billion natural gas pipeline project that would transport gas out of the Permian and help support power plant and data center growth in Texas. The project is forecast to be online by the end of 2026 and it’s backed by long-term, fee-based contracts.
In addition to its growth opportunities, the stock carries a 6.8% forward yield and it is projecting that it will raise its distribution by 3% to 5% a year moving forward. Energy Transfer is also one of the cheapest stocks in the midstream space with an enterprise value (EV)-to-EBITDA multiple of just 8.7 times. This makes it a great option for investors.
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Geoffrey Seiler has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
4 No-Brainer Pipeline Stocks to Buy With $1,000 Right Now was originally published by The Motley Fool
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