Energy Transfer Pivots to AI Data Center Energy Demand

Energy Transfer Aligns Infrastructure with Surging AI Energy Demands

Energy Transfer (ET), a prominent midstream energy company, is strategically re-orienting its extensive asset base to address the escalating energy requirements of artificial intelligence (AI) driven data centers. This strategic pivot positions the company to capitalize on a significant and growing segment of the U.S. energy market.

The Strategic Shift into Data Center Energy Supply

On February 10, 2025, Energy Transfer announced a landmark long-term agreement with CloudBurst Data Centers, Inc. This represents ET's inaugural major commercial contract to directly supply natural gas for data center power generation. Under the terms, Energy Transfer will leverage its Oasis Pipeline, LP, to provide up to 450,000 MMBtu per day of firm natural gas. This supply is specifically earmarked for CloudBurst's AI-focused data center campus, currently under development in Central Texas. The natural gas will facilitate "behind-the-meter" power generation, capable of producing approximately 1.2 gigawatts of electricity, supporting the data center's operations for a minimum of ten years. Phase 1 of this project is anticipated to be operational in Q3 2026.

This agreement underscores a broader market trend where data centers, now consuming approximately 3% of U.S. electricity, are increasingly relying on natural gas due to its reliability and scalability. ET's existing infrastructure, spanning over 140,000 miles of pipelines across 44 states, provides a substantial platform for this strategic expansion.

Market Reaction and Financial Performance

The move by Energy Transfer is being met with a bullish sentiment, reflecting the company's strategic alignment with high-growth AI and data center energy demands. Analysts view ET's units as a "Buy," citing the potential for solid long-term returns and a consistent distribution yield. Despite a recent correction in unit price, the company's diversified midstream operations, encompassing natural gas, natural gas liquids (NGL), and crude oil transportation, have consistently demonstrated stable EBITDA generation.

Financially, Energy Transfer reported record-setting results for the full year 2024. Adjusted EBITDA reached $15.5 billion, marking a 13% increase from 2023's $13.7 billion. Distributable Cash Flow (DCF), a key metric for master limited partnerships (MLPs), also hit a record high of $8.4 billion, a 10% year-over-year increase. For 2025, Energy Transfer projects continued financial strength, with adjusted EBITDA estimated to range between $16.1 billion and $16.5 billion. The company has also increased its quarterly cash distribution to $0.3250 per common unit, equating to an annualized rate of $1.30, a 3.2% increase compared to Q4 2023.

The units currently trade at a discounted EV/EBITDA multiple, offering a potential upside of over 40% alongside a consistent 7-8% distribution yield over the next 2-3 years, according to some analyses. This valuation, combined with the strategic tailwinds, forms the basis for the positive investment outlook.

Broader Context and Implications

The U.S. natural gas market is experiencing significant growth, primarily driven by increasing electricity demand and the burgeoning usage of AI. This positions Energy Transfer to benefit from favorable pricing and high return on invested capital (ROIC) projects. The midstream sector's ROIC has shown improvement, rising from 9.8% in 2015 to 11.9% in 2023, with ET's projects anticipated to push this figure to 12.7% by 2026.

Energy Transfer has outlined substantial capital expenditure plans for 2025, allocating approximately $5 billion for growth projects and an additional $1.1 billion for maintenance. This investment strategy includes projects like the Desert Southwest Pipeline expansion, a $5.3 billion endeavor designed to deliver 1.5 Bcf/d of natural gas from the Permian Basin to the Southwest by 2029, coinciding with projected peak data center demand. Similarly, the Hugh Brinson Pipeline will add 2.2 Bcf/d of bi-directional capacity by 2026, serving critical data center corridors in Texas.

While leveraging natural gas for data centers presents significant commercial opportunities, it also entails environmental and regulatory considerations. Energy Transfer is actively exploring cleaner gas technologies, including advanced gas turbines capable of operating with 30% to 50% hydrogen fuel content, with a long-term goal of 100% hydrogen. This approach aims to mitigate environmental pressures and align with the sustainability objectives of hyperscale data center operators.

Looking Ahead

The market will closely monitor Energy Transfer's execution of its strategic initiatives and its ability to secure further long-term contracts in the data center sector. The continued growth in AI and cloud computing is expected to more than triple U.S. data center power demand by 2030, presenting a sustained tailwind for companies capable of providing reliable and scalable energy solutions.

Key factors to watch in the coming periods include the progress of major infrastructure projects, the expansion of ET's data center supply portfolio, and ongoing developments in clean energy technologies within the natural gas sector. The company's ability to balance growth with environmental stewardship will be critical in solidifying its long-term market position as a key energy provider for the digital age.