The natural gas sector is experiencing a surge in demand, driven by a combination of factors including increasing consumption and the need for additional infrastructure. This perfect storm is creating a bullish environment for midstream energy stocks, which play a crucial role in the energy supply chain. Midstream companies provide essential services, including transportation, storage, and processing of crude and refined products.
According to industry expert Douglas Irwin, the compression market is particularly well-positioned to benefit from current trends. “We expect the compression market to tighten further, driven by increasing natural gas demand over the near-to-medium term,” Irwin notes. He estimates that this could lead to an additional 20+ billion cubic feet per day of natural gas demand by 2030, requiring around 12 million horsepower of incremental compression capacity in the US. This would represent a significant increase over current operating capacity, driving up utilization rates and prices.
Irwin recommends two midstream stocks that are poised to capitalize on these trends: Kodiak Gas Services (KGS) and Archrock (AROC). Both companies have received Strong Buy ratings from Wall Street analysts.
Kodiak Gas Services provides large-scale gas compression services on a contract basis, with a fleet of over 4 million horsepower of operating equipment. The company has a strong presence in the Permian basin and is well-positioned to benefit from growing demand. Irwin notes that Kodiak’s solid position in the industry, combined with its peer-leading utilization rates and revenue per horsepower, make it an attractive investment opportunity.
Archrock, a pure-play midstream company focused on natural gas compression, provides contracted natural gas compression services to customers across the US. The company has a market cap of nearly $3.6 billion and is a premier provider of compression services in the US midstream sector. Archrock’s recent acquisition of Total Operations and Production Services (TOPS) adds 580,000 horsepower of new operating capacity, further solidifying its position in the market.
Both Kodiak and Archrock have seen significant share price gains this year, with Kodiak up 51% and Archrock up 35%. Irwin believes that both companies will continue to deliver strong returns for investors, driven by their solid positions in a growing industry and their ability to capitalize on increasing demand.
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