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 become increasingly integrated into business operations, the demand for data centers is surging. According to the International Energy Agency’s 2024 report, global data center electricity consumption is projected to double by 2026. This rapid growth in data centers necessitates reliable energy sources, with natural gas emerging as a critical player in meeting this demand.
At the heart of this transformation are midstream energy companies, the often-overlooked workhorses 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, as they are less directly affected by the volatile swings in commodity prices. This stability often translates into consistent dividend payments, making them attractive to income-focused investors.
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.
During the quarter, Antero Midstream strategically expanded its footprint in the Marcellus Shale through a $70 million bolt-on acquisition of compressor stations and gathering pipelines from Summit Midstream. This move is expected to be immediately accretive to free cash flow and has prompted the company to raise its 2024 guidance. Analysts have a cautious stance on AM, with a consensus rating of "hold" and a mean price target of $14.36.
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. KNTK offers an attractive dividend yield of approximately 6.70%, with a quarterly dividend of $0.75 per share. The stock has outperformed on a year-to-date basis, with shares up by 34.5% in 2024.
Kinetik 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. The company’s adjusted EBITDA reached $234.4 million, reflecting a 13% increase from the previous year. Following these strong results, Kinetik revised its full-year adjusted EBITDA guidance range upwards to between $940 million and $980 million.
A significant development for Kinetik in 2024 is its strategic partnership with Diamondback Energy and EPIC Midstream Holdings, announced on September 24. 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 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’s strategic focus is on the transportation, storage, and processing of natural gas, natural gas liquids (NGLs), crude oil, and refined products. ET 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. Additionally, ET completed the acquisition of WTG Midstream Holdings LLC, adding approximately 6,000 miles of gas gathering pipelines and increasing its processing capacity in the Delaware Basin.
The Growing Demand for Natural Gas
As the demand for data centers and AI infrastructure continues to rise, the need for reliable energy sources becomes increasingly critical. Midstream companies like Antero Midstream, Kinetik Holdings, and Energy Transfer are well-positioned to capitalize on this trend. Their strong industry positioning, strategic expansions, and attractive dividend yields make them compelling options for investors seeking steady passive income in the midstream energy sector.
While the energy sector carries inherent risks, these stocks offer a balanced mix of stability and growth potential, making them worthy of consideration for those looking to invest in the evolving landscape of energy demand driven by technological advancements.