What does a cutting-edge artificial intelligence data center have in common with a natural gas pipeline built decades ago?
More than most investors realize.
The race to build AI may be dominated by headlines about chips, software and trillion-dollar technology companies, but the infrastructure supporting that growth could create opportunities in a much less glamorous corner of the market.
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About three years ago, I wrote my first article for Kiplinger. It focused on pipeline companies, which many investors expected would become obsolete from the global transition toward renewable energy.
I argued that the market was underestimating the durability of energy demand, particularly for natural gas, and the importance of the infrastructure required to transport and process it.
That thesis has not only held up — it may have become even more compelling.
Opportunities in the pipeline
AI is driving an enormous increase in electricity demand as data centers are built across the country. While renewable energy will undoubtedly play a critical role in meeting future needs, natural gas remains one of the most reliable and readily available sources of around-the-clock power.
As a result, many utilities have significantly increased their expectations for future natural gas power generation.
This creates an interesting opportunity for pipeline operators. Many of the companies that own the existing network of natural gas pipelines possess assets that would be incredibly difficult, expensive and time-consuming to replicate.
The AI revolution may be driven by cutting-edge technology, but it still depends on physical infrastructure built over decades.
Investors who experienced the painful collapse of the MLP sector during the last energy downturn may also be surprised to learn how much the industry has changed.
The old model of aggressively issuing debt and equity to finance growth has largely been replaced by a more disciplined approach focused on stronger balance sheets, internally funded growth, free cash flow generation and returning capital to shareholders.
This evolution is particularly important because it changes the way investors should think about the sector. Many people still associate energy investing with a simple bet on oil and natural gas prices.
However, many midstream businesses generate cash flow based on the volume of energy moving through their systems, often under long-term contracts, rather than the daily swings of commodity prices.
Investing in the age of AI
This idea is consistent with a broader framework I recently discussed in a Stansberry Asset Management webinar on investing in the age of AI: The best opportunities may not only come from the companies creating new technologies, but also from businesses with durable assets, low risk of obsolescence and an essential role in supporting the future economy.
For investors willing to roll up their sleeves, individual pipeline companies may present attractive opportunities. However, selecting the right exposure requires evaluating factors such as asset quality, growth opportunities, balance sheet strength and valuation.
Many investors may therefore prefer a diversified fund or to work with a professional investment manager such as Stansberry Asset Management (where I am the deputy chief investment officer) that can determine how best to incorporate this opportunity into a broader financial plan.
When I first wrote about pipeline companies for Kiplinger, the question was whether the world would still need them decades into the future. Today, that answer appears clearer than ever.
The AI investment nobody is talking about may not be the technology itself, but the infrastructure required to power it.
