Energy Transfer vs. Kinder Morgan: Which Natural Gas Pipeline Stock Is the Better Buy for the AI Power Boom?

Energy Transfer and Kinder Morgan are two of the largest midstream businesses in North America, both of which have reduced their dividends in the past but are now raising them steadily. However, with the rise of artificial intelligence (AI) and its impact on electricity demand, Kinder Morgan may be the more suitable investment, despite its higher price.

Here's what you need to consider when deciding between these two midstream operators. A significant effort is underway to build the infrastructure that supports AI, which requires a substantial amount of electricity. According to the International Energy Agency, between 2024 and 2030, electricity demand from AI is expected to increase more than four times faster than the growth of total electricity consumption from all other sectors.

This means the world needs more electricity, with some estimates suggesting electricity demand will grow by 60% between 2025 and 2045, up from just 10% between 2005 and 2025. Pipeline companies play a crucial role in supplying this electricity, as natural gas is increasingly being used to generate power. Additionally, businesses like Energy Transfer and Kinder Morgan primarily charge fees for the use of their energy infrastructure assets, meaning their revenue is less affected by volatile commodity prices.

The volume flowing through their systems is more important than the price of what is being moved. While both companies have a significant exposure to natural gas, Kinder Morgan's involvement is much higher, with natural gas accounting for 67% of its business compared to 35% for Energy Transfer. Kinder Morgan owns the largest natural gas transmission network in the United States, making it better positioned to benefit from the increased demand for natural gas used in electricity generation.

If you're solely focused on AI's impact on electricity demand, Kinder Morgan appears to be the better choice. However, Energy Transfer offers a higher dividend yield, currently at 6.7% compared to Kinder Morgan's 3.4%. Both companies have cut their dividends in the past, but they are now growing them steadily. If income is your primary goal, Energy Transfer may be the more suitable option, even though it may not benefit as much as Kinder Morgan from AI's growing electricity demand.

Ultimately, Wall Street seems to recognize Kinder Morgan's connection to the AI story, which has resulted in a lower yield for the stock in a sector known for providing attractive dividends. For those seeking income from their portfolio, Energy Transfer might be the more appropriate choice due to its higher yield.