Tracing Second Derivative Winners of AI Revolution

The highly anticipated AI revolution should produce many winners. In our view, those at the top of the food chain—AI solutions providers and GPUs (Graphics processing units)—have seen significant stock appreciation, but those lower in the food chain have not benefited to the same extent, even though they provide the necessary energy to fuel the AI processing networks. To run AI software, high-power computing (HPC) is required, and these data centers need sizeable high-reliability electrical power, which should drive well above historic-rate electricity demand growth. Although HPCs may prefer renewable power for sustainability purposes, the need for reliable year-round power may dictate reliance on natural gas generation also. Moreover, natural gas may also benefit from the start-up of under-construction LNG projects in NAM. We expect 20+ bcf/d demand growth through 2030 in NAM, requiring around 70-80 (at least) rigs targeting natural gas and 25-30 incremental pressure pumping crews.

In this report, we highlight stocks within ATB coverage that could benefit from the AI revolution as it flows down the food chain.

Highlights: 

Providers of Computing Power
Given the high capital requirements for AI development, including the GPUs, land infrastructure, and computing power, companies looking to invest in HPC and AI initiatives must seek out large, scalable, and cheap sources of computing power. The Electric Power Research Institute (EPRI) has a base case forecast for data center (DC) power demand in the US, growing at a 5% CAGR from 2023 to 2030, with a high-growth scenario of 15% growth. This could translate to 35GW incremental electrical demand by 2030 from DCs. With electrical power becoming a critical supply issue, BTC miners are in the process of converting power capacity previously earmarked for BTC mining to data centers. In our view, re-allocating power towards HPC/AI could help bring a high-margin, stable revenue stream to miners, leading ultimately to multiple expansion. We recommend BITF-T and RIOT-N.

Electrical Power: Fueling the AI Revolution
Power demand grew at less than 1% CAGR during the last two decades, but now industry sources predict >2% growth CAGR for electricity in the US, driven primarily by data center demand, and from increased demand for manufacturing, transportation, and general electrification. On the theme of the secular uplift in electrical power needs, we recommend TA-T and CPX-T.

Natural Gas Could be A Big Winner
For incremental electrical power generation, the industry would look at renewables and natural gas over the next 5-10 years. Although EIA data shows that the vast majority of electrical power plants under-construction or in the process of getting approved are renewable based, there are at least 20.6GW of gas-fired natural gas power plants on the drawing board, with nearly 88% planned for start-up by 2027. Given the intermittency issues facing renewables, we find gas-fired power plants to see a revival, especially as more hydrocarbon-friendly governments will be governing the US and Alberta. Overall, we expect natural gas demand to increase by 20bcf/d by 2030 and by another 20bcf/d by 2035. We estimate that industry would need to add 70-80 natural gas rigs in Haynesville or Appalachia to grow US natural gas production. Such an increase in rig activity could lead to demand for 25-30 frac crews. As investors gain confidence in the longevity of the cycle, a case for multiple expansion could be made. We recommend TRP-T, ENB-T, ALA-T, TOU-T, ARC-T, PTEN-N, PUMP-N, LBRT-N, PD-T and EFX-T.