Natural Gas is The Next Big Artificial Intelligence Play
One oddball company could be one of the biggest beneficiaries
Could this map from 1888 hold the key to one of the biggest AI stories right now?
It outlines land owned by a 136 years old former railway company. One that could become a massive beneficiary of the AI boom. Most people haven’t made the connection yet, but this could change in the coming weeks.
Because when it comes to AI, the mainstream usually only talks about two pillars:
Hardware : Nvidia, TSMC, ASML…
Software and Data: Microsoft, Google, Meta…
A third pillar is slowly making its way into the collective consciousness: AI’s extraordinary power demands.
AI’s insatiable hunger for electricity
A single ChatGPT query is estimated to consume about 15 times more energy than a Google search and almost 100 times more than checking your email.
Google’s AI sucks up enough power in a single second to charge 7 electric cars.
And Meta’s data centers consume enough electricity to power 151,000 homes.
This huge demand for power is only going to go up from here.
Across the US, many new AI data centers are expected to consume 100 megawatts each. That’s enough to power about 75 million average US homes.
Big Tech is beginning to take control of its energy supply to fulfill its needs. Its efforts in nuclear power are grabbing the headlines:
Three Mile Island is about to be restarted for Microsoft.
Amazon bought a 100% nuclear-powered data center for $650 million a few months ago.
And Sam Altman backs small modular reactor startup (SMR) Oklo (OKLO) with his private money.
Since IPO via SPAC in May 2024, Oklo could’ve more than doubled your money (if you could stomach a brutal plunge in between).
And Oklo isn’t the only nuclear company that went up significantly since the AI boom started with ChatGPT’s release.
Canadian uranium miner Denison Mines (DNN) doubled as well…
Centrus (LEU), a company that owns the only facility in the US licensed to produce high-assay, low-enriched uranium which many SMRs will need, more than doubled in price too…
And the world’s largest uranium supplier Cameco (CCJ) almost tripled.
Of course, the uranium business is complex. Various supply chain bottlenecks occurred in recent years and there’s considerable opaqueness to that industry.
85% of all uranium is usually sold under long-term, multi-year contracts with deliveries starting one to three years after the contract is made. These contracts are not made public.
So attributing these stock gains exclusively to the AI boom may be a stretch. However, the AI-power-demand narrative may have contributed to a rekindled investor interest in nuclear power.
Especially if you consider the premium Big Tech is willing to spend for nuclear energy.
According to Bloomberg:
[Microsoft] will pay owner Constellation Energy Corp. at least $100 a megawatt-hour for power from the Pennsylvania plant, according to estimates from Bloomberg Intelligence, while Jefferies LLC puts the figure at about $112. That compares to about $60 a megawatt-hour for wind and solar energy available now in the same region, according to Jefferies.
$100 a megawatt-hour vs. $60 a megawatt-hour may seem expensive. But that premium is driven by the need for uninterrupted operation of a AI data center. Nuclear power has a 93% capacity factor (=the amount of electricity produced during a specific period of time), while wind stands at 35%, and solar at just 25%.
Microsoft doesn’t want to switch off Copilot the moment it gets cloudy over its data centers in Virginia.
Bringing a mothballed reactor back online is no easy feat though:
Because the plants were slated for shutdown and safety checks were therefore stopped, regulators and companies must now navigate a complex licensing, oversight and environmental-assessment process to reverse the plants’ decommissioning.
That’s why it will take until 2028 for Three Mile to return to operation.
What about SMRs? They won’t be available anytime soon either.
According to optimistic estimates, Oklo’s first commercial Aurora reactor will be deployed in 2027. That is, if it doesn’t share NuScale’s fate. NuScale’s SMR project has been plagued by delays and exploding cost, leading to the ultimate termination of their first commercial contract.
Note though, that these setbacks didn’t stop shares from soaring. NuScale jumped 332% between its recent low in September 2024 and latest high in November 2024. (It grew a spectacular 2,492% if you consider its all time low in January 2024.)
What happened ? NuScale shares plunged after it cancelled its flagship project in November 2023. But in October 2024 the Biden-Harris Administration announced a $900 Million SMR initiative.
All this goes to show that the AI energy hype is real.
If NuScale finally succeeds building commercial SMRs, Microsoft will likely power its data centers with them.
Of course, there are many “ifs” involved with nuclear power. It’s among the most heavily regulated industries in the world. Even if regulators green light SMRs, you still have to convince the public that building them is a good idea.
As SMR companies envision, they’ll build these reactors much closer to populated areas than Generation 3 reactors like Three Mile Island.
The Emergency Planning Zone (EPZ) for a Gen 3 plant is 10 miles.
But as Oklo says in the Emergency Plan for its Aurora SMR:
The exterior boundary of the Aurora powerhouse makes up the EPZ.
In other words, Oklo’s SMR will have an EPZ that ends at the facility’s fence.
Nuclear power has been such a hot-button subject for decades that a huge “Not in My Backyard” backlash is practically guaranteed.
This will delay the mass adoption of SMRs even further. It’s not crazy to assume that it could take at least a decade until we’ll see any meaningful adoption of SMRs.
But Big Tech isn’t known for its patience. It wants power today.
And that brings us back to this map:
Because the land on this map holds a fuel that’s not only safe and (relatively) clean…
This fuel is free – in fact, you get paid to take it.
You might remember negative oil prices during Covid. Demand plummeted so quickly that the world ran out of storage space, making it cheaper to pay someone to take the oil off your hands.
This is a similar situation.
Unlike the oil market, which is globally integrated – prices are determined by international benchmarks like Brent Crude and West Texas Intermediate (WTI) – the market for this fuel is regionally fragmented.
In Europe prices can average $12.91 per MMBtu while they’re below $0.00 in Texas.
If you haven’t guessed already, I’m talking about natural gas.
Here’s the historical price and a forward curve for the Waha Hub Spot, which serves as a key price reference for natural gas produced in the Permian Basin.
Natural gas prices in the Permian are generally negative and are projected to remain so.
The New York Times explains:
Companies operating in the region are drilling primarily for crude oil, but natural gas typically comes out of the ground with that oil — so much of it that on some days, drillers run out of places to store the gas or the pipeline capacity to send it to the Gulf Coast or California, where there is demand for it.
Natural gas is the next big AI play
Google, Microsoft, and Amazon could rush into the Permian to get access to this cheap energy in no time. Technically it’s possible to build a gas fired power plant in a year or less. Modular solutions can be deployed in 120 days.
Elon Musk powers his xAI data centers in Memphis with natural gas (without the required permit though) and Microsoft launched a natural gas-powered data center in Seattle a few years ago.
Qatar – the world's second-largest liquefied natural gas (LNG) exporter and sixth-largest dry natural gas producer – wants to establish a “global technology hub” to attract AI data centers. Gas rich countries like Saudi Arabia or even Turkmenistan could try to attract similar investments.
We’ve seen a similar pattern with Bitcoin mining, where miners flocked to regions with cheap energy.
However, as the late Henry Kissinger warned, AI warrants the same attention as nuclear weapons. Placing AI data centers in foreign jurisdictions poses a significant security risk. You wouldn’t put the Air Force Nuclear Weapons Center in Qatar.
Chevron CEO Mike Wirth:
AI’s advance will depend not only on the design labs of Silicon Valley, but also on the gas fields of the Permian Basin […] natural gas will help power the rapid growth of artificial intelligence with its insatiable demand for reliable electricity.
According to analysts from Tudor Pickering Holt & Co, as much as 8.5 billion cubic feet per day of natural gas could be required additionally to match the rise in demand.
To put that into perspective: 89.1 billion cubic feet per day of natural gas was consumed in the entire US on average in 2023. We’re facing a demand increase of almost 10%.
As a result, prices could average as much as $4 per MMBtu according to Tudor Pickering Holt & Co. Almost double the average Henry Hub prices (the US national benchmark) this year.
What’s this company about?
As noted at the beginning, a company that began as a railway operator back in the 19th century might emerge as the unexpected winner.
It’s one of the largest landowners in Texas, primarily in the Permian Basin.
It holds approximately 873,000 surface acres. This company derives most of its revenue from oil and gas production but does not produce a single barrel of it.
It’s essentially a real estate company that collects nearly $100 million a quarter in royalties from oil producers like Exxon Mobil Corp., Chevron Corp. and ConocoPhillips while paying nothing toward the cost of their wells. The profit margin is at an exceptional 83%.
The company’s name?
Texas Pacific Land Corp. (TPL).
The stock went up 14% on the news it would replace Marathon Oil Corp. in the S&P 500 last Friday. Since the start of this year, the stock surged 232%, reaching $1,614 as of yesterday (November 25).
Management is well aware of the opportunity AI unlocks. Bloomberg reports:
“There’s a lot of conversations taking place within the industry and definitely within TPL” about leasing land to data centers, TPL Chief Executive Officer Tyler Glover said this month in a conference call with investors. “We feel that we’re positioned as well as anyone in West Texas to provide land and water solutions as those opportunities unfold.”
Is Texas Pacific Land Corp. a buy?
TPL’s strong financial health, growth in royalty production, and strategic acquisitions all point to a bullish outlook. However, shares are trading at a P/E ratio of more than 80, about 2.6 times higher than at the start of the year.
Even in growth-oriented industries, P/E ratios tend to average between 25-50. At 80, TPL would need to justify being valued as an ultra-growth or high-demand asset. AI’s power demand does seem to tick both these boxes. Remember, Microsoft is willing to pay a hefty premium to get uninterrupted power from Three Mile Island.
Also consider that the company’s most recent 10Q still flags negative gas prices as a source of volatility rather than an opportunity. But the “free fuel” narrative could drive the stock higher. After all, AI-related energy stories have already propelled cash-burning NuScale to new all-time highs.
Once tech giants like Microsoft begin constructing data centers in the Permian, this story could gain significant momentum. We can assume this transformation is already underway. As Reuters reports:
Devon Energy (DVN.N), Expand Energy (EXE.O), Diamondback Energy (FANG.O), and Permian Resources (PR.N), have highlighted the potential for AI and data centers to drive gas demand and said they were in initial discussions with many operators.
I’m adding a modest TPL position to my personal portfolio. Obviously, this is not investment advice. Do your own research.
What do you think? Is TPL a buy, overvalued, or even the next meme stock? Let me know in the comments!
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PS: Watch out for part 2. We’ll explore another AI/natural gas investment opportunity.
Peyto