There are three key demand drivers in focus for natural gas, which strengthen growth opportunities for midstream players.
It has become almost impossible to build new pipelines in a lot of different parts of the country, particularly pipelines that cross over the Appalachian Mountains, Williams (WMB) CFO John Porter said during a livecast on November 12.
This regulatory hurdle creates attractive growth opportunities for midstream players with existing assets in the region, such as Williams. The company operates Transco, the largest natural gas pipeline in the U.S. and only pipeline that runs south to north, east of the Appalachian Mountains. Transco extends from south Texas to New York City.
Electricity Usage Is Increasing
For a while, there was an expectation that electricity generation in the U.S. was going to flatten out. However, that has completely turned around, with estimates now predicting electricity demand will grow significantly.
“Now you have dramatically higher estimates of electricity usage generation in the U.S., no matter where you look,” Porter said. “For a while it was all about the fact that we were electrifying more and more things. Automotive, heat and air, industrial, all sorts of things were getting electrified. Now, you’ve got things like data centers and AI.”
Data centers and AI model training and running are energy-intensive processes, strengthening demand for electricity.
Through LNG Exports, Natural Gas Becomes International Commodity
Over the last roughly five years, U.S. natural gas has become an international commodity for the first time through the growth of liquefied natural gas exports. Most of these exports are happening along the Gulf Coast in Texas and Louisiana.
“Transco passes right through that key LNG corridor,” Porter said. “We’ve had an enormous ramp up in LNG developments. We have an enormous ramp up continuing in LNG exports through the next six or seven years.”
Coal Plant Retirement Opportunities for Natural Gas
For the last 15 years, coal fired electricity generation has gradually been taken out of service and replaced with low-cost natural gas.
“That has not been on the backs of government subsidies”, Porter said. “That has purely been on the economics of affordable natural gas that has about half the emissions of coal fired generation.”
This has had a significant impact. In fact, natural gas replacing coal-fired electricity generation has been the largest factor in emission reductions for the U.S., Porter said, adding that it’s not something that is well known.
While much progress has been made, there are still 217 coal fired power plants in the U.S. Seventy of them are in proximity to Transco.
Porter said coal fired generation will continue to be taken out of service and replaced with a combination of renewables and natural gas. Renewables, such as solar and wind, have intermittency issues. This causes the utilities to need a backup source of power generation, according to Porter.
“That backup capacity that they have to contract is natural gas, and it’s natural gas capacity that is, in many parts of the country, supplied by our interstate transmission pipeline,” Porter added.
How These Themes Drive Growth Opportunities
The three key demand drivers are factoring into expansion projects off Williams’ existing pipelines, Porter said.
The expansion projects are delivering strong returns, which are feeding more balance sheet capacity, Porter said. “It’s a very virtuous cycle we have right now because of the returns on the projects, the earnings growth, the balance sheet capacity, and then more and more of these projects showing up for us to bid for,” he added.
Williams is the seventh-largest holding in the Alerian Energy Infrastructure ETF (ENFR) and second-largest holding in the Alerian Midstream Energy Dividend UCITS ETF (MMLP).
See more: 4 Midstream Names in ENFR Report Earnings Beat, Raise Guidance
To learn more about midstream and the opportunities provided by growing U.S. natural gas demand, watch the replay here of our 30-minute webcast with Williams’ (WMB) CFO John Porter. Watch the replay here.
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