Stifel Taps Targa, Williams as Top Midstream Picks on Surging Data Center Power Demand

The U.S. energy midstream sector is well-positioned for sustained growth, buoyed by disciplined capital management and a significant surge in power demand, according to a new report from investment firm Stifel. Analysts identified Targa Resources (TRGP) and Williams Companies (WMB) as leading stocks set to capitalize on these favorable industry dynamics.

Sector-Wide Tailwinds

Stifel analysts noted a fundamental shift in the midstream industry, with companies now reinvesting only 40-50% of cash flow back into their businesses. The remainder is being directed toward shareholder returns, with the firm projecting that most companies in the sector will achieve an average return of capital yield of 7% by 2027. At the same time, leverage is expected to decline to a very low 0.4x.

A key growth catalyst is the accelerating demand for power, largely driven by the expansion of data centers. Stifel points to over 370 GW of announced data center projects in the U.S., with approximately 189 GW already linked to natural gas-fired power generation. This, combined with growing demand for liquefied natural gas (LNG), supports an attractive 3% compound annual growth rate for natural gas demand through 2030, according to the report.

Stifel's Top Selections

Stifel highlighted two companies as particularly well-positioned to benefit from this environment.

Targa Resources (TRGP)

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Targa is a central infrastructure provider in the prolific Permian Basin, where its dominant gathering and processing position is anchored by contracts with major oil companies and large exploration firms. Stifel praised Targa's integrated supply chain, which spans from the wellhead to export terminals, and its disciplined balance sheet, with leverage kept within its 3.0x-4.0x target range. The firm anticipates a significant near-term inflection in free cash flow that will support accelerated capital returns to shareholders.

Williams Companies (WMB)

As a premier U.S. natural gas infrastructure company, Williams offers investors exposure to secular demand growth through what Stifel calls a "differentiated power platform." The company's earnings are underpinned by the stability of its core transmission business, which relies on long-term, fee-based, take-or-pay contracts. Following significant deleveraging efforts, Stifel expects a medium-term cash flow inflection will allow Williams to maintain healthy distributions while preserving its investment-grade balance sheet.

Market Context

The positive outlook comes as the midstream sector remains under-represented in the broader market. Stifel noted that the sector constitutes roughly 3% of the S&P 500, a steep drop from its 12% weighting in 2011. The report also suggests that an optimal window for industry consolidation exists through the end of 2028, supported by more efficient permitting and merger review processes.