Kinder Morgan's (NYSE: KMI) growth engine has been stuck in neutral for the past several years. It earned as much last year as it did in 2018. The gas pipeline company has battled headwinds from higher interest rates, contract roll-overs, and asset sales to strengthen its balance sheet, which offset the growing demand for natural gas.
However, those headwinds are fading while demand from liquefied natural gas (LNG) export facilities is surging. Those catalysts have the company returning to growth mode this year. On top of that, artificial intelligence (AI) is emerging as a new demand driver for natural gas. It could significantly enhance Kinder Morgan's growth prospects, potentially giving it even more fuel to continue increasing its 5.5%-yielding dividend.
Supercharged power demand growth
U.S. electricity demand has grown very slowly over the years, averaging around 0.5% annually during the past two decades. However, there's growing consensus that demand growth will accelerate through the end of this decade. In recent months, industry experts have predicted that the demand for electricity in the U.S. could grow by 2.6% annually to as much as 4.7% annually until 2030. The main driver is AI and the new data centers needed to power that technology.
Kinder Morgan's co-founder and executive chair, Richard Kinder, discussed some jaw-dropping anecdotal evidence he has seen driving this view over the last few months on the company's second-quarter conference call. He highlighted that "one report indicates that Amazon alone is expected to add over 200 data centers in the next several years, consistent with the large expansions being undertaken by other tech companies chasing the need to service AI demand." These power-hungry facilities will drive significant electricity demand.
For example, Kinder noted:
In Texas, the largest power market in the U.S., ERCOT now predicts the state will need 152 gigawatts (GW) of power generation by 2030. That's a 78% increase from 2023's peak power demand of about 85 GW. This new estimate is up from last year's estimate of 111 GW for 2030.
While many tech giants want to power their data centers with renewable energy, "achieving the needed 24-7 reliability by relying only on renewables is almost impossible," commented Kinder. On top of that, "growth in usage is limited by the need for new electric transmission lines, which are difficult to permit and build on a timely basis." As a result, "there will likely be increased reliance on natural gas" to help meet the surging need for electricity. That drives the company's belief that the future for natural gas is even brighter.
The first of many
S&P Global expects U.S. utilities to add 133 new gas power plants over the next several years. Those new plants will drive increased volumes across existing gas pipelines and the need for additional pipeline capacity.
Kinder Morgan has already started capitalizing on the expected growth in natural gas demand from the U.S. power sector. It recently approved a significant new project to increase gas transportation capacity in the southeastern portion of the country.
The company and its partner, Southern Company, are moving forward with the proposed South System Expansion 4 to increase Southern Natural Gas' South Line capacity by about 1.2 billion cubic feet per day. The $3 billion project will help meet power generation and local distribution demand growth in the Southeast when it comes online in late 2028.
That project is likely the first of many. The company's management team noted on its second-quarter call that it's currently early in the process of evaluating 1.6 billion cubic feet of potential opportunities to supply gas to power data centers alone. That's part of 5 billion cubic feet of opportunities related to growing gas demand by the power sector. While not all of those projects will come to fruition, they represent a significant incremental growth opportunity for the company. It's on top of demand related to LNG projects and its other growth drivers, such as supporting lower carbon energy.
About to stomp on the gas
Kinder Morgan's growth engine has sputtered in recent years as it battled a series of headwinds. However, those headwinds have faded and are starting to give way to strong growth tailwinds from LNG and AI-related power demand. Those catalysts could give Kinder Morgan the fuel to grow its business and earnings briskly, which should support continued, and potentially accelerating, dividend growth. That income and upside opportunity make Kinder Morgan look like an increasingly attractive investment these days.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matt DiLallo has positions in Amazon and Kinder Morgan. The Motley Fool has positions in and recommends Amazon, Kinder Morgan, and S&P Global. The Motley Fool has a disclosure policy.
