5 Undervalued Energy Stocks to Play the AI Data Center Demand Boom

The ripples from the boom in artificial intelligence technologies are expected to spread across the economy, far beyond technology stocks. That includes even the energy companies that supply utilities delivering power to AI-focused data centers.

A reliable power supply is an integral component to the data centers that AI technology depends upon. And with Big Tech companies like Microsoft MSFT planning to invest billions of dollars to build new data centers, AI-related energy consumption is expected to grow.

“AI and data center demand offers a potentially sizable growth opportunity across our US exploration and production and US and Canadian midstream coverage list,” says Stephen Ellis, energy and utilities strategist at Morningstar. These companies are in the business of carbon capture, gas transportation, and trusted gas storage.

Stephen Ellis sees five stocks as best-positioned to benefit from AI and data center demand that are also trading below Morningstar’s fair value estimates:

• Chart Industries GTLS
• Energy Transfer LP ET
• Enbridge ENB
• Kinder Morgan KMI
• TC Energy TRP

Ellis also points to stocks that are likely beneficiaries but are trading at prices Morningstar deems fairly valued:

• Cheniere Energy Partners LP CQP/Cheniere Energy LNG
• Williams Companies WMB

Antero Resources AR, Range Resources RRC, and likely EQT EQT (which Morningstar does not cover, but EQT is acquiring Equitrans Midstream ETRN, which is covered) offer direct opportunities for investors to benefit from the AI-driven need to power data centers, Ellis says, but they are expensive based on Morningstar’s fair value estimates.

Energy Stocks and AI-Driven Data Center Power

Data centers are dedicated spaces for housing computer systems, including data processing hardware. This requires a large amount of electricity.

Investors have begun to price aggressive expectations for AI and data center-led growth in energy consumption into stocks, Ellis says. As a result, he prefers companies with more indirect exposure where any AI and data center upside is “more gravy to existing forecasts versus risking disappointment with more expensive stocks.”

Here is a closer look at Morningstar’s picks for energy stocks expected to benefit from data center growth.

Chart Industries GTLS

• Morningstar Rating: 4 stars
• Fair Value Estimate: $200.00
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Very High
• Forward Dividend Yield: None

Ellis says, “Last quarter, Chart noted growing potential for its carbon capture products to be driven by data center and AI demand. The need is mainly because the data centers are so energy-intensive. Chart’s product offerings include carbon capture and underground storage, and this quarter was the best ever for orders in this space.

“CCUS order sizes are now in the range of $5 million compared with $500,000 a few years ago. The backlog of work has essentially doubled since last year to $3.35 billion and is well above the $1.3 billion in mid-2022. Customers and potential customers stand at over 1,000 compared with 301 customers in mid-2022. Other areas include specialty compression, fans, air coolers that address needs across heat rejection and power generation across baseload and peak shaving, and storage.”

Morningstar gives Chart Industries a Fair Value Uncertainty of Very High. Ellis notes, “aside from the acquisition-related and financial risks introduced by the Howden acquisition, which are high, Chart also targets several specialty markets that are rapidly growing, and the future market and competitive conditions are highly uncertain.”

Read more of Stephen Ellis’ analyst notes here.

Energy Transfer LP ET

• Morningstar Rating: 4 stars
• Fair Value Estimate: $21.00
• Economic Moat: None
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 8.23%

“Several years ago, the partnership began to focus on connecting its assets to power plants located within 10 miles of its intrastate pipelines, says Ellis. “Now, Energy Transfer believes it is connected to about 55%-60% of the power plants in Texas, either directly or indirectly.”

Dallas is emerging as a key data center hub and ET says that “it is well positioned to benefit from perhaps 8 billion cubic feet per day of new data center demand, likely by 2030″

Ellis says, “Energy Transfer does have an alternative energy group, focused on renewables and reducing its environmental footprint. Historically, the group focused on dual-drive compressors (electric/gas), which lowered greenhouse gas emissions. More recently, those efforts have expanded to include carbon capture utilization and storage”

Read more of Stephen Ellis’ analyst notes here.

Enbridge ENB

• Morningstar Rating: 4 stars
• Fair Value Estimate: $41.00
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 7.54%%

“Enbridge is less exposed directly to natural gas versus peers such as Williams, Kinder Morgan, and TC Energy, which will benefit from providing the reliability of gas to help deal with renewables intermittence,” says Ellis.

“The utilities would primarily give exposure to data center-linked growth in Ohio, Utah, and North Carolina. Further, about 45% of North American power generation lies within 50 miles of its assets. Enbridge would capture some exposure via its renewables and gas storage assets as well.”

Read more of Stephen Ellis’ analyst notes here.

Kinder Morgan KMI

• Morningstar Rating: 4 stars
• Fair Value Estimate: $22.00
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 6.08%

Kinder serves 20% of US power demand and is serving most major US gas supply and demand regions. Ellis says, “Kinder Morgan’s assets span natural gas, natural gas liquids, oil, and liquefied natural gas. The company’s US gas pipeline business is particularly impressive.

“AI demand growth per Kinder management could increase gas demand by 7 billion cubic feet per day to 16 billion cubic feet per day by 2030. This demand growth would imply AI demand at around 15%-20% of electricity demand by 2030 from 2.5% in 2022. Gas would be serving about 40% of the incremental demand, due to the intermittence challenges with solar and wind.” Kinder would remain well positioned here, as it serves about 20% of the US power market and transports about 40% of US gas.

Read more of Stephen Ellis’ analyst notes here.

TC Energy TRP

• Morningstar Rating: 4 stars
• Fair Value Estimate: $47.00
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 7.44%

Ellis says, “TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas.

“Management said on the earnings call that data centers are a growth area, particularly in Wisconsin and Virginia, with multiple announced project wins, and growth of 6 billion cubic feet per day to 8 billion cubic feet per day of gas demand by 2030 is more than reasonable.

“Relatedly, given the importance of gas storage supporting data center and artificial intelligence demand, TC Energy noted its 650 billion cubic feet of capacity, with over 80% contracted to local demand centers under take-or-pay contracts often linked to a pipeline relationship, as well. The assets serve as a battery to meet peak demand.”

Read more of Stephen Ellis’ analyst notes here.

Cheniere Energy CQP

• Morningstar Rating: 3 stars
• Fair Value Estimate: $52.00
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 8.02%

Cheniere Energy Partners LNG

• Morningstar Rating: 3 stars
• Fair Value Estimate: $161.00
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 1.13%

Ellis says, “Higher US demand for gas is more of a problem for Cheniere than an opportunity. Higher demand means harder to source, and potentially higher prices, reducing US gas cost competitiveness compared with oil-linked contracts and other sources of global gas supply (Qatar most notably).

“If AI and data center demand is going to drive demand globally, then there’s the potential for countries such as Japan or China, which are heavy LNG importers, to require more LNG to serve their demand.”

Read more of Stephen Ellis’ analyst notes here.

Williams Companies WMB

• Morningstar Rating: 3 stars
• Fair Value Estimate: $38.00
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 4.74%

Williams indicates that “Power demand estimates are anywhere from 8 to 17 times higher than a few years ago, driven in part by AI and data center demand. The increased demand will naturally lead to more attractive pipeline and related investment opportunities for Williams.” Ellis notes he considers this an “unusually strong pipeline that provides a great deal of earnings security for investors.”

Read more of Stephen Ellis’ analyst notes here.