As the hype around artificial intelligence (AI) continues to spread, the once-sleepy utilities sector is starting to perk up. According to a report by Wells Fargo, the S&P 500 utilities sector saw a 3.6% gain in the first quarter of 2024, followed by a surge of more than 8% in the second quarter. This growth has been largely attributed to the increasing excitement around AI and data centers.
The rise of AI data centers is expected to drive a significant increase in electricity demand in the U.S. by 2030, potentially amounting to 323 terawatt hours. In response to this growing demand, tech companies are looking for power sources that can support their use of renewable energy sources. This is where natural gas comes into play.
According to Kimberly Dang, CEO of Kinder Morgan, gas demand is projected to increase substantially in the coming years, fueled by a doubling of liquid natural gas exports and a 50% rise in exports to Mexico. The anticipated surge in gas demand from power associated with AI and data centers further highlights the crucial role that natural gas will play in meeting the needs of tech companies.
Several utility companies have identified AI data centers as a significant opportunity for growth. While many companies are expected to benefit from this megatrend, a few standout names have been highlighted by Wells Fargo analysts. One such company is The Williams Cos., which is seen as a direct play on the AI data center buildout.
Williams has expansion plans in place to meet the rising demand for natural gas, including a project to add 1.6 billion cubic feet of capacity to its Southeast Supply Enhancement project. Despite being rated a hold by a majority of analysts, Williams has seen a 14% increase in its stock price in 2024 and offers a dividend yield of 4.8%.
Another company identified as a beneficiary of the data center trend is TC Energy, a Canadian company that offers a dividend yield of 7.3%. While half of the analysts covering the stock rate it as a hold, Wells Fargo considers it a buy. TC Energy’s chief operating officer, Stanley Chapman, highlighted the significant opportunity tied to data centers, estimating a demand of around 6 billion cubic feet a day by 2030.
Lastly, Oneok is also expected to see a boost from the AI trend, with plans to supply gas to multiple AI-related gas plant expansions. The company has experienced a 15% increase in its stock price in 2024 and offers a dividend yield of 4.9%. Wells Fargo rates Oneok as a buy, in line with just over half of the analysts covering the stock.
The utilities sector is undergoing a transformation fueled by the growing demand for natural gas driven by AI data centers. As tech companies continue to expand their use of AI, utility companies have a unique opportunity to capitalize on this trend and drive growth in the sector. With the right strategic investments and a focus on meeting the evolving needs of tech companies, utilities have the potential to play a critical role in the age of artificial intelligence.