The fanciest artificial intelligence (AI) chip on Earth becomes an expensive paperweight without electricity. That leaves investors with a choice. Buy the company promising the cleverest software, or buy a business helping keep the whole operation switched on.
The second route has become more concrete. Data centre developers need power for computing, cooling and networks, often before the local grid can deliver it. Building generation at the site can shorten that wait, creating equipment orders well before an AI customer starts paying for computing time.
For shareholders, the trick is following that spending to a business which can earn a profit from it. A gigawatt sounds impressive, but your brokerage account will eventually need something denominated in dollars.
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Power play
Behind-the-meter generation supplies electricity at the customer’s site instead of relying entirely on the public grid. Natural gas can provide steady output, although fuel supply, emissions permits and backup arrangements still need sorting out.
That creates an opportunity for companies designing and assembling the equipment. They can earn from construction and potentially from maintaining the machinery afterward. But how much of that work has actually been ordered?
Enerflex (TSX: EFX) supplied an answer on October 13. It announced a contract to design, engineer, fabricate and assemble more than one gigawatt of natural-gas-fired generation units for a large North American data centre development.
Its total backlog of this generation equipment now exceeds 1.75 gigawatts (GW), with deliveries extending through 2028. That gives the AI story a production schedule, which is considerably more useful than another slide featuring a glowing server rack.
Orders need margins
Enerflex already supplies energy infrastructure, processing equipment and services. The new order builds on those capabilities, giving it a route into data centre spending without requiring it to become a software company.
The company authorized approximately US$100 million to expand its Engineered Systems facilities and capabilities. That investment can increase the work it handles, but it also means shareholders fund capacity before collecting all the expected benefits.
I like the connection between an existing manufacturing business and a new customer need. I’d still resist translating generation capacity directly into earnings. Enerflex hasn’t disclosed the contract’s dollar value or project margin, so those figures can’t responsibly be filled in with enthusiasm.
Its latest quarter offers some perspective. Adjusted operating earnings before interest, taxes, depreciation and amortization (EBITDA) were US$128 million, slightly below the previous year’s US$130 million. The larger order book still needs to improve the financial result.
What are you paying for
At a recent $36.65 closing price, Enerflex had already gained about 7% from the week before. The declared quarterly dividend of $0.04 amounts to just $0.17 annually. That produces a yield around 0.46%, making this a growth purchase with a small cash payment attached.
For anyone buying stocks in Canada, that distinction helps size the position. The main risk is spending to expand production while delivery schedules, costs or customer plans change. A large order can keep a factory busy without making its shareholders richer if margins disappoint.
Natural-gas projects also face permitting and emissions constraints. Calling the equipment lower-emission doesn’t make its electricity carbon-free. I’d consider a modest position for a long holding period, funded separately from emergency savings. Inside a Tax-Free Savings Account (TFSA), eligible gains can grow tax-free, but contribution room and diversification still deserve attention.
Bottom line
Enerflex has moved beyond talking about AI power demand and secured substantial equipment work. The next opportunity lies in turning those deliveries into stronger cash generation, then keeping the customer relationship alive through years of service.
