Chevron Could Build a $7 Billion Gas Plant to Power Microsoft's AI Ambitions. Time to Buy the Energy Giant?

Chevron (NYSE: CVX) and investment fund Engine No. 1 are working to finalize a deal with Microsoft (NASDAQ: MSFT) to build a new natural gas-fired power plant in Texas. The proposed 2.5-gigawatt (GW) facility would be one of the largest in the country. It would provide power to a large AI data center campus.

The energy giant is looking to cash in on surging power demand from Microsoft and other technology companies to support their AI ambitions. This strategy could provide Chevron with a powerful new growth engine.

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Cashing in on excess gas

Early last year, Chevron and Engine No. 1 formed a partnership to build a new company focused on developing gas-fired power solutions for data centers. They planned to build large-scale "power foundries" capable of generating the massive amounts of electricity AI data centers need to power specialized chips, cooling systems, and other equipment that support AI. The companies initially planned to deliver up to 4 GW of capacity (enough to power up to 3.5 million homes).

The partners are getting close to securing Microsoft as a customer for their first power project. The three companies entered into an exclusive agreement for power generation and supply. Securing a deal would enable them to move forward with a 2.5 GW power plant in West Texas, which they expect will cost about $7 billion to build.

The project would enable Chevron to turn some of the associated natural gas produced in its oil operations in the Permian Basin into power for AI. The company and its peers in the Basin produce so much associated gas that it often sells at a significant discount or gets flared off due to a lack of pipeline takeaway capacity.

Adding another new growth engine

Chevron's oil and gas business is its main growth engine. The energy company completed several major growth capital projects last year, which, along with its acquisition of Hess, position it to generate a gusher of free cash flow this year. At $70 oil, Chevron can produce $12.5 billion in incremental free cash flow in 2026. It can generate an even bigger gusher this year if crude prices remain in the triple digits.

The energy giant has several more growth capital projects underway and in development. They support its outlook of delivering more than 10% compound annual free cash flow growth through 2030. Securing Microsoft as a customer for its power project in Texas would enhance its ability to deliver on its robust growth outlook.

The project is part of Chevron's strategy to build several new energy businesses to enhance its ability to grow in an increasingly lower-carbon economy. These projects will also reduce volatility in Chevron's cash flows, as long-term contracts will underpin their economics.

A compelling long-term investment

Chevron is making progress on its strategy to build out power plants to support AI data centers. That would enable it to maximize the value of its gas production through an asset that should produce stable earnings. It would put Chevron in a stronger position to achieve its long-term growth outlook. That high-octane growth makes Chevron look like an excellent energy stock to buy and hold long-term.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron and Microsoft. The Motley Fool has a disclosure policy.