We recently compiled a list of 10 High Growth Utility Stocks To Invest In. In this article, we will look at where Pampa Energia (NYSE:PAM) ranks among the high growth utility stocks to invest in.
According to a report by Goldman Sachs Research, the US electricity demand is set to surge in the coming years, driven in part by the growing need for power to support the increasing use of artificial intelligence (AI) and data centers. After a decade of roughly zero growth in power demand, the US is expected to experience a significant increase in electricity consumption, with demand rising by around 2.4% between 2022 and 2030.
The report estimates that around 0.9% of this growth will be driven by the increasing power needs of data centers, which are expected to use 8% of US power by 2030, up from 3% in 2022. This surge in demand will require significant investment in new generation capacity, with US utilities needing to spend around $50 billion to support data centers alone.
Furthermore, the report notes that the incremental power consumption of data centers will also drive an increase in natural gas demand, with an estimated 3.3 billion cubic feet per day of new demand expected by 2030. This will require new pipeline capacity to be built to meet the growing needs of the data center industry.
In contrast, the report highlights that Europe’s power demand has been declining over the past 15 years, largely due to a series of economic shocks, including the global financial crisis, the COVID-19 pandemic, and the energy crisis triggered by the war in Ukraine. Despite this, the report notes that Europe will still need to invest over $1 trillion to prepare its power grid for the increasing demands of AI and electrification.
Investors Are Plugging into the Utility Sector Amid the AI Boom
In an interview on Yahoo Finance, Pavel Molchanov, Managing Director at Raymond James, discussed the growing connection between the utility sector and the emerging trend of Artificial Intelligence (AI). Molchanov shed light on why utilities have become an unexpected beneficiary of the AI boom.
According to Molchanov, as the world becomes increasingly reliant on data centers to power AI technologies, the demand for electricity is expected to surge. This has led investors to take notice of the utility sector, which is poised to benefit from the growing need for power. Molchanov noted that while utilities are a regulated industry with fixed prices, the overall electricity demand is ultimately driven by the economy. Therefore, if data centers can create growth in overall US power demand for the first time in 20 years, it would be a positive development for utility companies.
Molchanov emphasized that utilities are still a defensive play but with a twist. The sector is expected to experience a modest growth rate of 2-3% per year, driven by the increasing demand for electricity. This growth is significant, considering that the US electricity demand has been stagnant since 2007.
The conversation also touched on the regional variability in the utility sector, with certain areas being more attractive for data centers due to lower electricity prices. Molchanov mentioned Virginia, Ohio, and Texas as regions that are well-positioned to benefit from the growth in data centers, while California is less attractive due to its high power prices.
The increasing use of AI and data centers will have a significant impact on the global energy landscape. The need for significant investment in new generation capacity and infrastructure to support this growth is clear. With that in context let’s take a look at the 10 high growth utility stocks to invest in.
Our Methodology
To compile our list of the 10 high growth utility stocks to invest in, we used the Finviz and Yahoo stock screeners to find the 50 largest companies utility companies. We then narrowed our choices to 10 companies with the highest 5-year revenue growth. We also included their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their of their revenue growth.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Pampa Energia (NYSE:PAM) is one of the largest energy companies in Argentina and is involved in electricity generation, transmission, and distribution, as well as oil and gas exploration and production. The company’s diverse energy portfolio includes both conventional and renewable sources.
Pampa Energia (NYSE:PAM) has been facing significant challenges in its segments, with stagnation in key areas and limited growth potential due to infrastructure constraints and political uncertainties. The company’s Q2 results show flat growth in gas and oil production, with no new projects in power generation and an $80 million impairment loss imposed by the government. Despite challenges, Pampa Energia’s (NYSE:PAM) gas segment, which accounts for 94% of its oil and gas production, has seen a 40% increase in production levels compared to 1H23. However, this growth has been offset by falling prices, resulting in flat operating income for the segment.
The company’s oil segment has also seen slow growth, with production expanding 7% in Q2, but with a goal of ramping up production to 40-50 thousand barrels per day by 2027. The segment generated an operating income of $69 million in Q2, in line with expectations. Pampa Energia’s (NYSE:PAM) power generation segment is also facing challenges, with the government canceling all generation projects awarded in 2023 and no new mechanism in place for private players to invest in large-scale generation capacity. However, the company is completing previous projects and finishing a 130MW renewable energy project, which could provide growth opportunities.
Pampa Energia’s (NYSE:PAM) petrochemical segment has seen a 6% increase in production and a similar increase in operating profits, driven by volume growth. This segment is small but is expected to generate $40 million in operating income. Pampa Energia’s (NYSE:PAM) gas segment could see growth if the government approves plans to increase the GNK pipeline capacity, while the oil segment could see increased production if the company is able to ramp up production to its goal of 40-50 thousand barrels per day.
The power generation segment could also see growth if the government introduces a new mechanism for private players to invest in large-scale generation capacity. The petrochemical segment could continue to see growth driven by volume increases, and the company’s holdings in TGS and Transener could continue to generate equity gains. Pampa Energia (NYSE:PAM) is anticipated to experience 42.33% earnings growth this year.
Overall PAM ranks 2nd on our list of the high growth utility stocks to invest in. While we acknowledge the potential of PAM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PAM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
