Key Takeaways
- Volume is the key driver. We believe Midstream, including the pipelines, processing plants and terminals moving gas from wellhead to market, stands to benefit as U.S. gas demand could rise around 25% over five years
- The opportunity set is widening. Beyond transporting gas, some operators are building dedicated gas-fired power generation for large-load customers like data centers
- Portfolios are underallocated. Energy in total is currently only near 3% of the S&P 500, and most portfolios hold little midstream
U.S. midstream sits at the intersection of two powerful forces: a domestic natural gas cycle and a global reassessment of energy security. Neither of these mega-drivers is being priced at current market levels, in our view.
For midstream businesses, which consist of pipelines, processing plants, storage and export terminals moving natural gas and liquids from wellhead to market, the fundamentals are driven by volume and throughput, not by commodity price movements. Simply put, if more natural gas moves across U.S. systems over the next several years, earnings growth should follow—without requiring a specific view on commodity price outcomes. We believe operating leverage to rising volumes, visible cash flows, and discounted valuations make U.S. midstream a compelling way to invest in the next phase of energy infrastructure growth.
As the world reassesses energy security, AI-driven power demand, and the next wave of LNG growth, we see an attractive opportunity in U.S. midstream companies whose assets are central to these long-term changes.
U.S. Natural Gas Demand Is Set to Grow Around 25% Over Five Years
U.S. natural gas demand is expected to increase by 25-30 billion cubic feet per day (Bcf/d) over the next five years, rising around a quarter from its current base of approximately 110 Bcf/d1. LNG exports are the largest contributor, with high-growth scenarios suggesting 13-17 Bcf/d of incremental demand. AI, data centers, and broader electricity demand could add another 6-10 Bcf/d.2 Coal plant retirements and coal-to-gas switching provide further support, while stable industrial demand anchors baseline volume.
This should drive demand for the next decade or more, in our view, requiring substantial investment in compression, processing, takeaway capacity, and export infrastructure. Leading midstream companies are well positioned amid this buildout to earn attractive returns on invested capital, supporting continued growth in cash flows and distributions.
Chart 1. LNG Exports and Power Demand Lead the Next Wave of U.S. Gas Growth
Why Energy Security Favors U.S. Natural Gas Exporters
Recent geopolitical events have sharpened the focus on how much of the global energy system still depends on flows through chokepoints such as the Strait of Hormuz. Buyers are increasingly prioritizing reliable supply, diversified transportation routes, and politically stable counterparties, reassessing the strategic value of alternative supply chains rather than simply reacting to spot prices.
We believe the U.S. should be a primary beneficiary of that reassessment. Even a modest, sustained preference for secure, contract-backed U.S. supply can support incremental demand for export capacity, gathering systems, long-haul pipelines, storage and terminal infrastructure. While global diversification is one source of demand, we think the domestic outlook may matter more for midstream volumes.
How Fee-Based Midstream Contracts Limit Commodity Price Risk
Midstream earnings are supported by multiyear fee-based contracts, largely with investment-grade counterparties. Under capacity-based agreements, customers pay for reserved capacity regardless of actual utilization, helping insulate cash flows from commodity price fluctuations.
Despite this protection, midstream equities have at times declined alongside commodity prices, creating a disconnect between share prices and underlying fundamentals. While past performance doesn’t predict future results, we believe long-term equity performance should reflect the durability and growth of cash flows more than short-term commodity price movements.
Midstream Operators Are Building Behind-the-Meter Power for AI Data Centers
Hyperscale data centers consume a massive amount of power, and recent project announcements indicate natural gas is emerging as the preferred energy source: in most areas where these data centers are built, it is the most abundant and accessible option, while both wind and solar remain constrained by intermittency. Midstream companies involved in the transport of natural gas are participating in the data center buildout effort in multiple ways. Some are working with utilities to bring more natural gas to the grid. Others are taking the opportunity a step further by partnering directly with data center operators and constructing their own power generation as part of what is known as a “behind the meter” solution, or power delivered straight to the customer rather than through the public grid.
For example, one midstream operator has disclosed approximately $10 billion invested through a power-focused joint venture to fund data-center power projects. According to our research, five of this operator’s projects together represent over 2,500 MW of capacity, with contracts running 10 to 12.5 years and phased in-service dates over the next two years.
Midstream operators are not relying solely on future load forecasts; they are structuring projects around identified counterparties and multi-year agreements today. The boundaries of midstream are expanding to include integrated power solutions that give large-load customers dependable energy supply at the point of use.
Why Midstream Remains Underweighted Despite Improving Fundamentals
Since the 2015 oil price downturn, the industry has strengthened balance sheets, adopted more disciplined capital allocation, and placed greater emphasis on sustainable cash flow and distributions to shareholders. Growing natural gas demand and further investment in energy infrastructure are now adding to that foundation.
Yet the market has been slow to price this in and midstream remains underrepresented in most portfolios. With energy currently comprising only about 3% of the S&P 500, investors whose portfolios closely track the index have limited exposure to the sector, and even less to midstream specifically. We see this gap between improving fundamentals and persistent underexposure as a source of potential re-rating.
Risks to the U.S. Midstream Outlook, and Why the Case Holds
Should geopolitical tensions ease, international buyers may pay less of a premium for diversified, US-sourced volumes. Execution risk, regulatory timelines, cost inflation, and the pace of AI-driven power demand are additional variables worth monitoring.
Importantly, none of these factors undermine the core domestic story: LNG build-out, power demand growth, and data center load should support meaningful infrastructure utilization regardless of how the global reassessment plays out. At most, a moderation in geopolitical tailwinds may temper the pace of upside demand but not the underlying volume trajectory.
As the US supplies more of the world's natural gas and domestic demand continues its climb, the pipelines, processing systems, and terminals that move those molecules become increasingly critical. Equity valuations for midstream companies remain meaningfully below broader market averages, which we believe offers a long runway for further appreciation as the market recognizes both the volume growth and the discount. The market may still be viewing midstream through the lens of past energy cycles, but we believe the sector is increasingly positioned as critical for the next phase of US energy demand.
