When looking for high-yielding stocks in the energy sector, there’s no better place to look than the midstream sector. Midstream companies are involved in a number of activities, but are widely known for transporting crude, natural gas and NGLs (natural gas liquids) through their networks of pipeline assets.
These pipeline companies are generally little exposed to energy prices and play a large part in the increase in hydrocarbon volumes. In this regard, the midstream industry could benefit greatly from the proliferation of generative artificial intelligence (AI) in data centers, as AI applications consume enormous amounts of energy.
In fact, the Boston Consulting Group predicts that data centers could account for up to 7.5% of total electricity consumption in the United States by 2030. As more data centers are built to meet to meet this demand, they will need to be located near cheaper natural gas resources, and their increased energy consumption will lead to increased pipeline volumes.
Let’s look at two high-yielding midstream stocks that could benefit from this AI power-burning trend that investors should buy now.
1. Energy transfer
With nearly 90,000 miles of pipelines, 235 billion cubic feet (bcf) of operational storage capacity and more than 65 natural gas processing and processing facilities, Energy transfer (NYSE:ET) is one of the largest natural gas transporters in North America. The company has the largest integrated midstream system in the United States, touching nearly every point in the midstream process from the wellhead to the final destination.
Permian natural gas is among the cheapest in the United States because drilling is for oil, attracting energy-hungry data centers to the region. With the increase in natural gas consumption due to AI, Energy Transfer is positioned for projects to expand its existing Permian system to provide natural gas to meet the growing energy needs of these data centers.
At the same time, the company is in one of the best financial conditions in its history, with a solid balance sheet and a very well covered distribution. THE master limited partnership (MLP) has a yield of 8.2% based on its most recent quarterly distribution, and it plans to increase it by 3% to 5% per year going forward.
Trading at 7.3 times on an enterprise value (EV) to forward EBITDA basis, the stock enjoys an attractive valuation both relative to its midstream peers and over a historical basis. I prefer to use this metric when evaluating midstream companies because it takes into account their debt and excludes non-monetary items such as depreciation.
Given Energy Transfer’s valuation, strong balance sheet, and potential growth opportunities arising from AI’s increased energy consumption, it currently seems like a smart stock to invest $1,000 or more in, as it offers both a high yield and strong potential for price appreciation.
2. Kinder Morgan
With approximately 67,000 miles of natural gas pipelines, Morgan Kinder (NYSE:KMI) transports approximately 40% of the natural gas consumed in the United States. It also has an operational storage capacity of 702 billion cubic feet, which represents approximately 15% of U.S. capacity. With a strong set of assets in the Permian and throughout Texas, the company is also well-positioned to benefit from the growing demand for natural gas from the region’s data centers.
Kinder Morgan management was particularly vocal about the positive effect AI power consumption would have on its business during its latest earnings conference call. He said utilities across North America are “sounding the alarm” about increasing energy consumption from data centers and that natural gas will play a significant role in generation. electricity to meet this growing demand. The company said it was already working with a utility in the Southeast looking to connect to its system, given its need for reliable power.
The company is well organized to avoid fluctuations in commodity prices, with 68% of its cash flow coming from take-or-pay or hedged contracts where volumes and prices are fixed, and 27% from fee-based contracts where prices are fixed and volumes are variable. Only 5% of its cash flow comes from activities exposed to commodity prices.
Trading at 9.5 times on an enterprise value (EV) to forward EBITDA basis, the stock is attractively valued when considering its recent history. Unlike Energy Transfer, Kinder Morgan is structured as a corporation. Thus, its financial structure does not require shareholders to file a Schedule K-1, which some investors dislike due to the additional paperwork at tax time. The stock currently has a yield of 5.8%.
Overall, Kinder Morgan is another solid, high-yield pipeline well-positioned to benefit from growing demand for natural gas from IA. As such, the stock looks like another smart buy.
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Geoffrey Seiler holds positions in energy transfer. The Motley Fool posts and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
The Smartest High Yield Energy Stocks to Buy with $1,000 Right Now was originally published by The Motley Fool
