The once-sleepy utilities sector, known best for its ability to pay steady dividends, is starting to perk up as artificial intelligence hype spreads — and a few names might be poised to capitalize, according to Wells Fargo. The S & P 500 utilities sector posted a 3.6% gain in the first quarter of 2024, but it has already surged more than 8% in the second quarter, lifted by excitement around AI and data centers. The growth of AI data centers could drive as much as 323 terawatt hours of electricity demand in the U.S. by 2030, according to Wells Fargo. That is where natural gas enters the picture, as tech companies look for power that can back up their use of renewable energy sources. “Gas demand is expected to grow significantly between now and 2030 with a more than doubling of [liquid natural gas] exports as well as a 50% increase in exports to Mexico,” Kinder Morgan CEO Kimberly Dang said on the pipeline company’s earnings call in April. “And that doesn’t include the anticipated substantial increase in gas demand from power associated with AI and data centers,” she added. A slate of utility companies called out AI data centers on their latest earnings calls, but a few are expected to capitalize on the megatrend, according to a Friday report from a team of Wells Fargo analysts led by Michael Blum. “We continue to see [ The Williams Cos .] as the most direct play, but expect the AI data center buildout to spread to several regions, which could drive higher multiples for all gas companies,” Blum wrote. The company has expansion plans in the works to meet rising demand for natural gas, including a plan to add about 1.6 billion cubic feet of natural gas capacity to its Southeast Supply Enhancement project, serving the Mid-Atlantic and Southeast markets. Williams is rated a hold by about 56% of the analysts covering the stock, per LSEG, including Wells Fargo. Shares are up 14% in 2024, and the stock offers a dividend of 4.8%. TC Energy is another name Wells Fargo highlighted as a beneficiary from the data center trend. The Canadian company offers a dividend of 7.3% and is rated hold by about half the analysts covering the stock, per LSEG. Wells Fargo rates the name a buy. On its latest earnings call earlier this month, Stanley Chapman, chief operating officer, natural gas pipelines at TC Energy, said the overall opportunity tied to data centers and demand for natural gas is “probably around 6 billion cubic feet a day by 2030.” Chapman noted TC already serves a data center in Virginia, which is a big hub for the industry. U.S.-traded shares of the stock are down just over 1% in 2024. Finally, Oneok is also expected to see a boost from the AI trend, and the company is working to supply gas to a trio of AI-related gas plant expansions, Blum noted. Shares of Oneok are up 15% in 2024, and the stock offers a dividend yield of 4.9%. Blum rates the name a buy, as do just over half the analysts covering the name, per LSEG.
