Investors are warming up to the sector with an eye on Big Tech demand.
By Liam Denning
Let it rip.Photographer: Rebecca Droke /AFP
New Yorkers bowing their heads into a cutting wind is typically a bullish sign for natural gas prices, and this January is no exception. The rally extends beyond immediate conditions, though, with average futures for the next 12 months close to breaking above $4 per million British Thermal Units for the first time since January 2023, when they were coming down from the prior year’s Ukraine war-related spike. Beyond the cold weather, there is a shift in the overall climate for gas, centered on a revival in US electricity demand.
Source: Bloomberg
Note: Spot price is for Iroquois Pipeline Zone 2 NYC hub.
For more than a decade, natural gas has delighted customers but mostly disappointed investors. Shale made gas competitive with coal and nuclear — but mostly via excessive supply putting gas into a structural bear market. Meanwhile, as demands to combat climate change accelerated from emissions reduction to net zero, the natural limitations of gas — which still emits carbon when burned, albeit less than coal — muddied the prior narrative of it being a “bridge” fuel. Demand for gas-fired power increased as coal declined, but flat electricity demand overall and rising renewables penetration capped those gains, such that exports of liquefied natural gas have been crucial in soaking up supply.
Yet it is mostly the power sector now stirring interest again. US electricity consumption finally looks set to resume growing on the back of reshoring, greater electrification of processes and, most notably, proliferating data centers for developing AI tools. While Big Tech professes a fondness for nuclear power, new reactors are too far off for immediate ambitions. Hence, hyperscalers are signing deals for gas-fired generation, such as Meta Platforms Inc.’s recently signed multi-billion dollar contract with Entergy Corp. in Louisiana.
Only about a year ago, the pipeline of planned new plants and retirements of existing ones, as reported to the Energy Information Administration, indicated a net decline in US gas-fired capacity during the second half of this decade. That is decidedly no longer the case.
Source: Bloomberg NEF
Note: Planned capacity additions net of planned retirements, as indicated on the Energy Information Administration’s monthly Form 860 survey of operators.
The exclamation point on all this came in Constellation Energy Corp.’s recently announced $29 billion deal for Calpine Corp. The latter’s private equity buyout in 2018 occurred at a nadir in the public market’s appetite for merchant generation companies. Now those buyers have made a killing. The deal is unmistakably a bet on demand growth, with Constellation, which trades at a premium multiple due to its big nuclear fleet, handing over a 16% stake in itself plus billions of dollars in cash for mostly gas-fired plants and with relatively little promised in the way of synergies.
A race is on to offer, and own, gas-to-power infrastructure and equipment. Exxon Mobil Corp.’s recent proposal to build and run gas-fired plants, for example, leverages data center operators’ impatience with nuclear development timelines to effectively tee up funding for the oil major’s carbon capture pilots.
At the smaller end of the scale, Fortress Investment Group LLC announced earlier this month the acquisition of 850 megawatts of mobile gas turbines that can supply onsite power to data center operators awaiting grid hookups or wanting backup. That fits with comments from equipment manufacturers. GE Vernova Inc. told analysts last month that, rather than just traditional power generation developers, it is talking directly with data center operators seeking to buy gas turbines. Meanwhile, Caterpillar Inc. cites a backlog of 18-24 months for reciprocating generator sets, mostly due to demand from data centers for backup power.
This extends to gas pipeline operators. Energy Transfer LP said on its last earnings call it had received requests for connection from more than 40 data centers that could imply extra demand of up to 10 billion cubic feet per day — equivalent to more than 10% of the US’s entire gas demand currently. That isn’t going to happen. Still, even allowing for this sector’s indefatigable self-confidence, it fits with the wider context and converting just some of those prospects implies growth. Rival Williams Cos. has made similar comments and even talked on its last earnings call of extending into the onsite power generation business itself. Certainly, the reappraisal of electricity and gas trends that has fired up power generation stocks has spread to the pipeline sector, pushing valuations to their highest in more than a decade.
Source: Bloomberg
This end of the gas value chain, downstream of the wellhead and closer to customers prioritizing speed, looks like where the biggest premiums can be earned, whether they be on electricity contracts or equipment.
Gas prices should ultimately find support, too, of course, but with the caveat that about 40% of domestic gas production comes from oil wells. This decouples a significant share of supply from gas prices, an important quirk that has undercut prior rallies as the oil market swings differently. In addition, while prospects for gas have brightened, in the power sector it remains locked in a long-term battle with renewables and batteries (plus, if they eventually show up, new nuclear reactors) for market share. Gas-fired capacity that gets built today may not necessarily burn as much gas a decade down the road. But it must still be bought and paid for, as we are seeing unfold right now.
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