Heavy equipment giant Caterpillar (CAT) saw its shares climb approximately 3% to around $1,015 in late-morning trading on Monday, following Chevron Corporation's announcement that a Caterpillar subsidiary will supply power generation capacity for Project Kilby. The project is a massive 2.67-gigawatt natural-gas power development linked to a Microsoft-operated data center in West Texas, marking one of the largest co-located power-and-computing initiatives disclosed in the United States.
This development provides concrete evidence that Caterpillar is no longer merely an indirect beneficiary of artificial intelligence-driven energy demand but is now a named supplier in a high-profile project. The company's Power & Energy segment has been a standout performer, with first-quarter sales surging 22% to $7.03 billion, while power-generation sales alone jumped 41% to $2.82 billion. The growth has been fueled by large reciprocating engines and turbines primarily used in data center applications.
Chevron revealed that its 20-year agreement with Microsoft is designed to deliver dedicated power to the data center while alleviating strain on the regional electrical grid. GE Vernova is slated to provide the majority of Kilby's generation capacity, but Caterpillar's Solar Turbines unit will contribute additional capacity with turbomachinery and power-generation packages ranging from 1 to 39 megawatts. This scale is well-suited for phased buildouts and service-intensive contracts rather than one-off machine sales.
The co-located power model, where electricity is generated near the data center and supplied directly behind the meter, is becoming increasingly attractive to technology buyers. These buyers are not just purchasing backup generators but are helping underwrite dedicated power projects. Caterpillar benefits from a broad portfolio that includes gas turbines through Solar, large engines, construction equipment for site development, and an extensive dealer and service network that can convert installed capacity into recurring revenue streams.
On the financial front, Caterpillar recently raised its quarterly dividend by 12 cents, or 8%, to $1.63 per share. The company expects to return substantially all of its Machinery, Power & Energy free cash flow to shareholders through dividends and buybacks. Chief Executive Joe Creed stated, "That's driving profitable growth, strong MP&E free cash flow and a dividend increase."
However, valuation concerns persist. GuruFocus estimated Caterpillar's discounted earnings value at $531.05, sharply below its current trading price. Simply Wall St pegged fair value at $913.29, also below recent levels. These metrics suggest limited upside if AI-related power orders slow or profit margins disappoint. In the first quarter, Caterpillar cited unfavorable manufacturing costs tied to higher tariffs, and Power & Energy margins declined despite higher sales.
Adding a governance dimension, shareholders elected Lynn J. Good, former chief executive of Duke Energy, to Caterpillar's board. Her utility background is particularly relevant as electricity access becomes a core commercial issue for the company's largest new end market. A shareholder proposal seeking action by written consent was defeated.
For investors, Project Kilby offers a cleaner test of whether co-located data center power can transform a hot narrative into tangible backlog, margin expansion, and cash flow. While Caterpillar's stock has moved significantly ahead of proof, the company's role in this landmark project provides a concrete foundation for its AI energy thesis.
