Elon Musk pushes the envelope, which is part of being a visionary and company founder. However, his latest move in the artificial intelligence space could have very material implications for the energy sector. Here’s why Elon Musk’s decision to build a natural gas power plant could be a major benefit for midstream businesses like Enterprise Products Partners (EPD -0.26%), Enbridge (ENB +0.82%), and Kinder Morgan (KMI +0.28%).
Elon Musk takes matters into his own hands
Artificial intelligence (AI) is really just a fancy computer program. AI needs power to work. But it takes time to get a grid connection. Moreover, connecting to the power grid affects other customers who use it. Higher electricity prices for all users are not something that regulators or customers want to see, but that is exactly what has been happening.
Image source: The White House.
Tesla‘s (TSLA -2.14%) recent earnings report highlights how much the company is spending on AI and AI-related technology, such as self-driving cars and autonomous robots. Space Exploration Corporation (SPCX -2.68%) is also spending heavily on AI, as its prospectus made clear. The full extent of the company’s plans will likely be a key focus of its upcoming earnings release, its first as a public company.
However, Elon Musk is clearly making big moves in the AI space. That includes building two massive AI data centers in Tennessee called Colossus I and II. Musk likes to make bold statements, but the size of the data centers justifies the names. To help power them, he purchased natural gas turbines and built an off-grid natural gas power plant in Mississippi. Nearby residents and regulators aren’t happy and are suing, but it appears that the U.S. government is backing Musk.
Midstream companies win either way
The important investment story here isn’t really what Elon Musk is doing. The story is why he is doing it. Natural gas is a reliable base-load power source. Natural gas power plants can be built relatively quickly. It is relatively efficient power, as well. As utilities and non-utilities look to produce more power, natural gas is likely to see increased demand.
Enterprise Products Partners
Today’s Change
(-0.26%) $-0.10
Current Price
$38.70
Key Data Points
Market Cap
Day’s Range
$38.58 – $39.05
52wk Range
$30.01 – $40.16
Volume
78.1K
Avg Vol
3.5M
Gross Margin
13.45%
Dividend Yield
5.65%
Demand is the most important factor driving the financial results of midstream companies that transport natural gas, such as Enterprise, Enbridge, and Kinder Morgan. These businesses own the energy infrastructure that helps move natural gas, charging customers fees for the use of those assets. The price of the commodities moving through their energy systems is less important than the volume. More demand means more volume.
Today’s Change
(0.82%) $0.46
Current Price
$56.86
Key Data Points
Market Cap
Day’s Range
$56.47 – $56.98
52wk Range
$44.58 – $58.45
Volume
2.7M
Avg Vol
4.1M
Gross Margin
30.95%
Dividend Yield
4.87%
That helps on two fronts. First, it boosts current revenues and earnings. Second, it supports the need for additional energy infrastructure, which creates growth opportunities. Enterprise and Enbridge are both high-yield choices, with yields of 5.7% and 5%, respectively. Kinder Morgan’s yield is 3.6%, which is still attractive, but below the 4% that many dividend investors seek. That said, Kinder Morgan claims to have the largest U.S. natural gas transmission network. It will be a material beneficiary if natural gas demand increases due to greater use to power AI data centers.
Today’s Change
(0.28%) $0.09
Current Price
$32.86
Key Data Points
Market Cap
Day’s Range
$32.60 – $33.26
52wk Range
$25.60 – $34.80
Volume
9.4M
Avg Vol
10.1M
Gross Margin
36.12%
Dividend Yield
3.58%
And this isn’t just a U.S. phenomenon; demand for electricity is set to rise worldwide. Clean energy alone won’t be enough to supply all that power, so an all-of-the-above approach is highly likely. All three of these North American midstream giants also own assets that support the export of natural gas. If Elon Musk’s decision to turn to natural gas is any indication of the future, Enterprise, Enbridge, and Kinder Morgan have very solid outlooks.
Dig in and generate a reliable income stream for years to come
To be fair, Enterprise, Enbridge, and Kinder Morgan aren’t growth stocks, like a Tesla or SpaceX. They are income stocks, which limits who will want to buy them. However, if you are a dividend investor, Elon Musk’s decision to turn to fossil fuels to power his AI plans makes the midstream story all the more attractive and, perhaps just as important, durable.
