U.S. energy infrastructure providers are on pace to post their best year in many, as investors hedge against volatility in the commodity markets and wager on long-term demand fueled by the rise of power-guzzling technologies such as generative AI.
The Alerian Midstream Energy Index, which tracks major North American pipeline and storage companies, is up about 46% this year after hitting a record high in March. This compares with the nearly 25% gains in the broader S&P 500 index during the same period.
Alerian index constituents Kinder Morgan and Targa Resources are set for their best yearly gains, while Williams Co is on track for its best year in nearly two decades.
“We’ve seen fairly substantial flows from a lot of institutional investors over the past six months,” said Kenny Zhu, research analyst at Global X ETFs, a New York-based provider of exchange-traded funds.
Energy infrastructure firms’ fixed-fee model shields them from the volatility in oil and gas prices, while the sector also benefits from surging U.S. production.
Payouts in the form of dividends and buybacks due to stable cash flows are also pulling in small investors, experts said.
The explosive growth in artificial intelligence and the related insatiable demand from data centers to run the power-hungry applications have reinforced the segment’s appeal.
“There’s no artificial intelligence without energy infrastructure, because AI needs the power 24 hours a day, seven days a week,” said Rob Thummel, senior portfolio manager at asset management firm Tortoise. Additionally, several liquefied natural gas export projects are expected to come online in the latter half of the decade, further boosting demand for pipelines.
However, building new large-scale pipelines is not an easy task in the U.S., as they often run into regulatory hurdles, making existing infrastructure even more valuable. “If you have pipelines in the ground right now, you’re in a really good spot because those are going to become more and more valuable as demand continues to grow,” said Zack Van Everen, director of research at TPH&Co.
(Reporting by Sourasis Bose in Bengaluru; Editing by Sriraj Kalluvila)