AI summit draws attention to gas E&Ps' progress on data center deals

Investors in upstream US natural gas producers want second-quarter updates to relay progress on direct supply negotiations with power producers and data centers, according to analysts, especially now that developers have announced their intent to invest tens of billions of dollars to build and power artificial intelligence computing in Pennsylvania.

Over several quarters, gas-weighted E&Ps have communicated a bullish view of demand growth prospects associated with AI and teased that they were in talks with hyperscalers and power developers about supplying them with fuel. Among the news broken at the July 15 Pennsylvania Energy and Innovation Summit was that EQT, the Appalachia Basin's largest gas producer, secured offtake agreements covering 1.4 Bcf/d of gas supply for data center and power projects.

"Skepticism around the magnitude of the 'Gas to AI' theme has been building among investors," Jefferies analysts wrote on July 16. "This week's announcement should quell some of that, as these announcements alone account for a significant percentage of what's incorporated in our longer-term estimates for incremental US gas-fired demand."

Investors are especially interested to know how gas E&Ps will materially benefit from such deals, TPH head of research Matt Portillo said in a July 21 note to clients previewing Q2 earnings.

"With EQT earnings this week, investors will be looking for incremental color on pricing or [free cash flow] uplift from these contracts and how the company may approach growth vs. using existing volumes to help tighten regional basis further," Portillo said.

Upstream gas AI opportunity

Projections of gas demand growth potential related directly to data centers can vary widely. S&P Global Ratings analysts, in research published early in the year, estimated that US data centers' energy demand could lead to additional gas demand of 3-6 Bcf/d by 2030, depending on the share of power demand ultimately met by renewables.

EQT estimates 6-7 Bcf/d of local demand growth by 2030 driven by power and data centers, executives have said.

The market for direct gas supply deals is especially hot in Pennsylvania for several reasons, including the immense scale of data centers and related power projects, and the difficulty of building new interstate pipelines connecting Appalachian shale gas to prospective data center sites outside of the region, EQT CEO Toby Rice said in a July 18 interview.

"If these were 50 MMcf/d deals, 100 MMcf/d deals, you can find that flexibility in the system and just buy it from the pipeline essentially," Rice said. "But because the scale is so big, you're going to want -- people are going to want to go and get that supply set up."

In the years ahead, the 1.4 Bcf/d in offtake agreements give EQT the option to grow from its roughly 6 Bcf/d gas production base, Rice also said. During the last quarter, he and CFO Jeremy Knop stressed EQT intends to increase production only where it wins new firm customers.

In-basin peer Antero Resources has offered similar guidance, with CFO Michael Kennedy saying the company is "not going to grow into ... local basis without the demand meeting the need for the supply."

The company's investors want to hear news of a deal to supply gas directly to a customer, Siebert Williams Shank analysts said in a July 16 earnings preview.

Antero "expects to remain in maintenance mode ... until there is in-basin demand, as it pretty much maxed out its capacity of long-haul volumes out of the basin," the analystssaid. "Thus, a deal to directly supply a data center or utility would be needed to see growth longer term."

Ultimately, operators with deep inventories will be key beneficiaries of an AI data center and related gas-fired power buildout, Simon Wong, a portfolio manager with Gabelli Funds, told Platts, part of S&P Global Commodity Insights.

"I expect more of the Haynesville producer to cater to the LNG while the Appalachian producers, given the amount of inventory they have -- I expect to hear more data center deals from them," Wong said.

LNG, gas macro

LNG is the other game in town. After touching all-time highs at more than 17 Bcf/d in April, feedgas demand dipped in the subsequent months to less than 15 Bcf/d owing to seasonal maintenance at some export facilities, data from S&P Global Commodity Insights showed. Demand has recovered in July, averaging about 16.2 Bcf/d month to date.

Commodity Insights North American gas analysts' latest projection calls for summer-over-summer feedgas demand growth of 3.6 Bcf/d, in large part due to the incremental commissioning of Venture Global's Plaquemines LNG in Louisiana. Federal regulators have authorized the flow of feedgas to most of Plaquemines' 36 liquefaction trains, and Venture Global has said it expects all 36 trains to be producing LNG by the end of the year.

Next in line is ExxonMobil-QatarEnergy joint venture Golden Pass LNG, an 18.1 million mt/year export facility in Texas. Exxon expects Golden Pass to produce first LNG by the end of 2025.

Analysts said they will be looking for commentary from gas producers about market fundamentals and their drilling and completion plans in light of the rising demand for LNG feedgas.

As of July 21, the balance of the Platts M2MS Henry Hub forward strip was $3.61/MMBtu, with the 2026 forward strip priced at $4.16. The group is not generally expected to relay an increase in D&C spending yet, Wong of Gabelli Funds said.

"Prices need to move up to incentivize drilling, the supply to meet demand," Wong said. "Generally ... the operator likes to see 2-3 quarters of gas prices holding above the, call it, $4.00-$4.50 range to give them confidence to start drilling -- to say, hey, this is not just going to move back down tomorrow."

Second-quarter earnings calls for the group will commence on July 23 with EQT and Range Resources.