Morningstar

DeepSeek Raises Doubts About Gas Demand Growth Upside

We are maintaining our fair value estimates for gas-heavy midstream and upstream stocks.

In this photo illustration a Kinder Morgan logo is seen on a smartphone screen.
SOPA Images via Getty
Securities in This Article
Williams Companies Inc
(WMB)
Antero Resources Corp
(AR)
EQT Corp
(EQT)
Range Resources Corp
(RRC)
Kinder Morgan Inc Class P
(KMI)

The release of Chinese artificial intelligence firm DeepSeek’s open-source reasoning model R1 has raised questions about how much energy will be required to power future data centers. We still think data center growth will create more electricity and gas demand, but not as much as market valuations suggested.

Why it matters: Shares of midstream and upstream firms with large natural gas exposure were down on Jan. 27 due to speculation that open-source models like R1 will result in less energy demand growth.

  • R1 illustrates the potential threat to gas demand if computing efficiency gains require less energy, particularly electricity. Natural gas is the primary fuel source for new electricity generation in the near term.
  • Many energy stocks with significant gas exposure were among the best performers in 2024. Valuation multiples expanded beyond historical norms due to excitement for data center energy growth.

The bottom line: We view the selloff as overdue. Gas-heavy midstream and upstream stocks are still among the most overvalued in the sector. We believe data centers, reshoring, and electrification will remain a tailwind, but we think market expectations went too far.

  • We are maintaining our fair value estimates and moat ratings for midstream firms Williams WMB ($40 per share), Kinder Morgan KMI ($22), and Energy Transfer ET ($21).
  • We are maintaining our fair value estimates and moat ratings for upstream firms Range Resources RRC ($22.50 per share), Antero Resources AR ($24), and EQT EQT ($41).

The big picture: We think US gas demand and infrastructure will grow during the next five years, even if power generation is a smaller driver.

  • Williams has identified more than $10 billion of growth opportunities totaling 11.5 billion cubic feet/day. Kinder plans to invest $2.5 billion in growth annually, resulting in 5% annual EBITDA growth.
  • Producers like Range could benefit from pipelines coming online and the US lifting the ban on liquefied natural gas export permit applications.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Sponsor Center