The Impact of AI on the Energy Sector: A New Era for Midstream Companies
The rise of artificial intelligence (AI) is reshaping industries across the globe, and the energy sector is no exception. As AI and cloud computing technologies gain traction, the demand for data centers is skyrocketing. According to the International Energy Agency’s 2024 report, global data center electricity consumption is projected to double by 2026. This surge in demand is creating a pressing need for reliable energy sources, with natural gas emerging as a key player in this evolving landscape.
The Role of Midstream Energy Companies
At the heart of this transformation are midstream energy companies, often the unsung heroes of the oil and gas industry. These firms specialize in the transportation, storage, and processing of natural gas and other energy products. Unlike their upstream (exploration and production) and downstream (refining and marketing) counterparts, midstream companies typically enjoy more stable cash flows. This stability arises from their less direct exposure to the volatile swings of commodity prices, making them attractive to income-focused investors.
As the demand for energy sources to power data centers increases, midstream companies are well-positioned to capitalize on this trend. Let’s explore three midstream energy dividend stocks that are poised to benefit from the AI data center megatrend while providing investors with a steady stream of passive income.
Energy Dividend Stock #1: Antero Midstream Corporation (AM)
Antero Midstream Corporation (AM) is a mid-cap player in the midstream energy sector, focusing on gathering, compression, processing, and fractionation assets primarily in the Appalachian Basin. Over the past year, AM stock has gained about 25%, including a return of 19.8% so far in 2024. The company offers an appealing dividend yield of approximately 5.99%, based on its quarterly dividend of $0.225 per share.
Financially, Antero Midstream reported solid Q2 2024 results, with adjusted earnings per share of $0.23 narrowly missing expectations. The company generated revenues of $270 million, up from $258 million a year ago, driven by increased high-pressure gathering volumes. Free cash flow surged 41% year over year to $43 million after dividends.
In a strategic move, Antero Midstream expanded its footprint in the Marcellus Shale through a $70 million bolt-on acquisition of compressor stations and gathering pipelines from Summit Midstream. This acquisition is expected to be immediately accretive to free cash flow and has prompted the company to raise its 2024 guidance.
Energy Dividend Stock #2: Kinetik Holdings Inc. (KNTK)
Valued at $6.8 billion, Kinetik Holdings Inc. (KNTK) is a fast-growing player in the midstream energy sector, focusing on the transportation and processing of natural gas and crude oil in the Permian Basin. Kinetik offers an attractive dividend yield of approximately 6.70%, with a quarterly dividend of $0.75 per share.
KNTK has outperformed on a year-to-date basis, with shares up by 34.5% in 2024. Priced at less than four times forward cash flows, the stock appears reasonably valued. The company reported robust Q2 2024 results, with net income surging by 52% year-over-year to $108.9 million, and revenues totaling $359.46 million, surpassing analysts’ expectations.
A significant development for Kinetik in 2024 is its strategic partnership with Diamondback Energy and EPIC Midstream Holdings. This collaboration involves acquiring a 30% equity interest in the EPIC Crude pipeline system and establishing new transportation arrangements, expected to secure long-term volume commitments starting in 2025.
Energy Dividend Stock #3: Energy Transfer LP (ET)
With a market cap of $53.6 billion, Energy Transfer LP (ET) is a titan in the midstream energy sector, boasting an extensive network of pipelines and processing facilities across North America. With over 130,000 miles of pipeline infrastructure spanning 44 states, ET focuses on the transportation, storage, and processing of natural gas, natural gas liquids (NGLs), crude oil, and refined products. The company offers an attractive dividend yield of approximately 8.04%, with a quarterly dividend of $0.32 per share.
Over the past 52 weeks, ET stock has gained 15.2%, with shares up 16.5% on a year-to-date basis. Financially, Energy Transfer reported Q2 2024 net income attributable to partners of $1.31 billion and adjusted EBITDA of $3.76 billion, up from $3.12 billion in Q2 2023. Despite missing revenue estimates, the company raised its full-year adjusted EBITDA guidance to between $15.3 billion and $15.5 billion.
In July 2024, Energy Transfer announced a strategic joint venture with Sunoco LP to combine their crude oil and produced water gathering assets in the Permian Basin. This venture is expected to enhance distributable cash flow per unit, further solidifying ET’s position in the market.
The Future of Midstream Energy Companies
As the demand for natural gas continues to rise, particularly from emerging sectors like data centers and AI infrastructure, midstream energy companies like Antero Midstream, Kinetik Holdings, and Energy Transfer are well-positioned to thrive. With their strong industry positioning, strategic expansions, and attractive dividend yields, these companies offer a balanced mix of stability and growth potential for investors seeking passive income in the energy sector.
The intersection of AI and energy is not just a trend; it represents a significant shift in how we think about energy consumption and production. As data centers proliferate and the demand for reliable energy sources grows, midstream companies will play a crucial role in powering this new digital age.