Data centers reignite natural gas demand

Gas midstream stocks have re-rated over the past year. This has come alongside enthusiasm around the data-center buildout and the expected increase in U.S. power demand. So are midstream stocks now tied to the fate of tech stocks?

We believe that the data-center frenzy caused generalists to take a look at the stocks, bringing broader attention to a sector that had been weighed down by unrealistically low outlooks for long-term gas demand. For much of the 2019–23 period, investors believed that gas demand would be in decline by the 2030s in the U.S., something that we thought required an unrealistically rapid pace of buildout of wind, solar and batteries. Data centers were the spark that was needed for the market to realize how little was priced into these stocks. Even though data centers add only a marginal amount of gas demand in our view, perhaps 5% over the next 10 years, the boom in LNG and industrial growth supports long-term demand. This has underwritten new pipeline projects in areas that had been underinvesting for a decade.

Last year, many investors viewed pipeline supply deals with data centers as catalysts for stocks, but we caution that the actual capex and EBITDA impact associated with connecting to a data center is actually relatively small. We believe that the real catalysts will be deregulation in the Trump era, allowing more capacity in areas that have been historically impossible to build in, as well as LNG projects and reindustrialization. We think that long-term gas demand expectations have more room to go as we continue to see this play out, and that in a volatile sector, the contracted nature of gas midstream stocks makes them extremely defensive and attractive.