Energy Transfer Is Taking Its First Step to Cash In on AI-Fueled Natural Gas Demand

Artificial intelligence (AI) requires a tremendous amount of electricity to power the specialized chips needed to run this technology. Because of that, many forecasters expect that natural gas demand will accelerate in the coming years as companies build more power plants to support AI data centers. This trend should enable pipeline companies to transport more gas in the future.

As a leading natural gas pipeline operator, Energy Transfer (NYSE: ET) is in an excellent position to capitalize on the expected AI-powered surge in gas demand. The company recently took its first step to cash in on growing gas demand from data centers. Here's a look at the deal and the company's gas-fueled growth potential.

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Powering an AI data center

Energy Transfer recently revealed that it has entered into a long-term agreement to provide natural gas to CloudBurst's flagship AI-focused data center development in Central Texas. The company will provide up to 450,000 MMBtus per day of natural gas to CloudBurst's Next-Gen Data Center Campus near San Marcos, Texas, assuming CloudBurst reaches a Final Investment Decision (FID) with its customer on the project.

That's enough natural gas to generate about 1.2 gigawatts (GW) of direct electricity to power that data center. That's a lot of electricity. For perspective, 1 GW is enough to power about 750,000 homes for a year.

CloudBurst hopes to reach an FID on this project later this year. That would put it on track to be operational by the third quarter of 2026. The gas supply agreement will last 10 years, starting with phase one of this project.

CloudBurst chose Energy Transfer because of its confidence in the pipeline company's ability to supply the gas it needs to keep its facility running 24 hours a day, seven days a week, 365 days a year. That's due to Energy Transfer's vast pipeline network (105,000 miles of pipelines) and large gas storage capacity (236 billion cubic feet). That strong strategic position is leading CloudBurst to look for other potential data center sites on or near Energy Transfer's natural gas pipeline system using its proprietary site selection software.

The first of many

This gas supply contract is the first commercial agreement that Energy Transfer has signed to directly supply gas to a data center. It likely won't be the last. Co-CEO Tom Long discussed the company's AI-fueled growth potential on its third-quarter conference call in November:

We currently serve gas-fired power plants in 15 states with approximately 185 plants served via direct or indirect connections throughout these states, and our opportunities have only increased since our last call. We have had requests to connect to approximately 45 power plants that we do not currently serve in 11 states that in aggregate could consume gas loads up to 6 Bcf per day. In addition, we have had requests from over 40 prospective data centers in 10 states. These data centers in aggregate could consume gas loads up to 10 Bcf per day.

That's a massive amount of incremental natural gas demand. For context, total U.S. natural gas demand reached 110 Bcf per day last year.

While Energy Transfer won't win all those projects, its vast pipeline system puts it in a strong position to capitalize on growing gas demand. The company noted in the CloudBurst press release that it's in discussions with several other data center developers about supplying them with gas.

Growing gas demand by data centers will also help support new investment opportunities to increase gas supplies across the country. For example, the company recently approved the $2.7 billion Hugh Brinson Pipeline project. The 400-mile pipeline will have the capacity to transport 1.5 Bcf/d of gas from the gas-rich Permian Basin to the Dallas area, where it will connect to the company's pipeline and storage infrastructure. Energy Transfer is also building some gas-fired power generation capacity to support the growing electricity needs along its pipeline system in Texas.

Increased gas volumes will grow Energy Transfer's cash flow. That will give the pipeline company more money to raise its lucrative cash distributions to investors. It currently aims to grow its 6.4%-yielding payout by 3% to 5% per year.

A growth accelerator

Energy Transfer's vast natural gas pipeline system puts it in a strong position to capitalize on growing gas demand from data centers. It recently signed its first deal to transport gas directly to a data center, which will likely be the first of many such agreements. The company will also likely need to build additional gas infrastructure in the country to help support increased gas supplies.

These growth drivers should give the company fuel to continue growing its high-yielding dividend. That makes Energy Transfer a great way to cash in on the AI boom (for those comfortable receiving the Schedule K-1 tax form the MLP sends investors each year).

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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.