BMO Capital Markets Initiates Bullish Coverage on U.S. Midstream Energy Sector
BMO Capital Markets Initiates Bullish Coverage on U.S. Midstream Energy Sector
U.S. midstream energy companies have received a significant boost in investor sentiment, with BMO Capital Markets initiating bullish coverage on the sector. This positive outlook is primarily driven by an anticipation of increased global electricity demand, which is expected to fuel further investment in natural gas pipelines and export terminals.
The Event in Detail
On September 19, 2025, BMO Capital Markets launched coverage on several key U.S. midstream energy firms with "Outperform" ratings. The firms receiving this favorable assessment include Williams (NYSE:WMB), Kinder Morgan (NYSE:KMI), Cheniere Energy (NYSE:LNG), and Targa Resources (NYSE:TRGP). BMO set price targets of $66.00 for Williams, $32.00 for Kinder Morgan, $268.00 for Cheniere Energy, and $185.00 for Targa Resources. This move comes despite a recent broader decline in the energy sector due to falling crude oil prices.
Analysis of Market Reaction
BMO's bullish stance stems from a re-evaluation of the sector's fundamentals. Historically, midstream stocks have traded at a discount, burdened by concerns over debt and commodity price volatility. However, the brokerage now asserts that these companies possess stronger balance sheets, more stable, fee-based contracts, and clearer long-term demand prospects. The core thesis revolves around a global shift in electricity consumption patterns. As BMO Capital Markets analyst Ameet Thakkar noted:
> "Demand for gas infrastructure in response to power demand growth, LNG exports, and re-industrialization gain traction."
Broader Context and Implications
The International Energy Agency (IEA) projects global electricity demand to rise at a Compound Annual Growth Rate (CAGR) of 3.4% through 2026, with over one-third of this growth driven by data centers and electrification. By 2030, Goldman Sachs research indicates that data centers could account for 8% of U.S. power consumption, up from 3% in 2022. This surging demand underpins the sustained need for natural gas as a critical bridge fuel, leading to significant investment in infrastructure.
Williams (NYSE:WMB), a natural gas-focused midstream operator, is anticipated to achieve an 8% EBITDA CAGR from 2024 to 2029, exceeding its long-term target, and offers a 3.5% dividend yield. Kinder Morgan (NYSE:KMI) is seen as poised for an inflection point after a period of limited growth, benefiting from increased demand for gas infrastructure. Cheniere Energy (NYSE:LNG), the largest U.S. LNG exporter, stands out with exceptional earnings visibility backed by long-term take-or-pay contracts averaging 16 years. Targa Resources (NYSE:TRGP), strong in the Permian Basin, is expected to drive EBITDA and free cash flow (FCF) growth, with volumes outpacing the basin average, despite a slowdown in drilling. Targa recently reported an EPS of $2.87, significantly beating consensus estimates of $1.95, though revenue of $4.26 billion fell short. The company maintains a P/E ratio of 24.08.
The Energy Information Administration (EIA) forecasts U.S. natural gas consumption to reach a record 91.4 billion cubic feet per day this year, with a 1% increase in 2025. This long-term demand forecast, coupled with the improved financial health of midstream operators, suggests a re-rating potential for the sector.
Looking Ahead
The ongoing expansion of U.S. energy infrastructure is characterized by simultaneous growth in natural gas and renewable energy, driven by increasing demands from data centers, electric vehicles, and industrial electrification. Utilities and hyperscalers are increasingly relying on natural gas, leading to extended wait times for gas turbine orders and rising construction costs for new natural gas plants. This dual investment strategy aims to meet escalating energy demands while balancing sustainability goals. Investors will be closely watching continued global electricity demand trends, further investment in LNG export capacity, and the financial performance of these midstream companies as they navigate this evolving energy landscape.
