Energy Transfer (TXSE: ET) and Kinder Morgan (NYSE: KMI) are two of the largest midstream businesses in North America. Although both have cut their dividends in the past, they are growing them at a steady clip today. However, as artificial intelligence (AI) shifts the demand story in the electricity sector, Kinder Morgan is likely the better-positioned business, if you’re willing to pay for it. Here’s what you need to know to choose between these two midstream operators.
What does the midstream have to do with AI?
There is a massive effort underway to build the infrastructure that supports artificial intelligence. However, at its core, AI is just a fancy computer program. It doesn’t exist without electricity. The more AI infrastructure that’s built, the more electricity is needed. Between 2024 and 2030, the International Energy Agency expects electricity demand from AI to increase “more than four times faster than the growth of total electricity consumption from all other sectors.”
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The world needs more electricity in a big way, with some estimates that electricity demand will grow by 60% between 2025 and 2045. That’s up from growth of just 10% between 2005 and 2025. Pipeline companies are a vital part of supplying this electricity because natural gas is increasingly being used to generate power.
There’s more good news. Businesses like Energy Transfer and Kinder Morgan largely charge fees for the use of their energy infrastructure assets. So while commodity prices can be highly volatile, midstream companies largely sidestep that risk. The volume flowing through their systems is more important than the price of what is being moved. In other words, Energy Transfer and Kinder Morgan are likely to benefit from AI regardless of what happens to natural gas prices.
Which is better positioned: Energy Transfer or Kinder Morgan?
There is a notable difference between Energy Transfer and Kinder Morgan regarding natural gas. Natural gas makes up around 35% of Energy Transfer’s business, while Kinder Morgan’s exposure is 67%. In fact, Kinder Morgan claims to own the largest natural gas transmission network in the United States.
From this perspective, Kinder Morgan is better positioned to benefit from increasing demand for the natural gas used to generate electricity. If that is all you are focused on, it is probably the better choice for your portfolio.