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Plains All American on Oil Demand Longevity

Oil demand has increased tremendously in the past few years, rebounding from COVID-era lows.

Just three years ago, in the early months of the pandemic and lockdowns, oil demand declined alongside strengthening pressure for energy transition initiatives. During that time, there was a perception the world could quickly transition away from traditional fossil fuels.

However, the past few years have demonstrated the resilience and long-term role of traditional fossil fuel sources. “We’re now hitting record oil demand — 102 million barrels per day — and forecast to continue increasing over the coming years,” Plains All American VP of investor relations Blake Fernandez said during a LiveCast on November 7.

A few factors are playing into the strengthening demand for traditional energy sources, according to Fernandez.

First is population growth, which will always provide ongoing energy demand, according to Fernandez. Next, there is a disconnect between the standard of living in emerging economies and more developed economies. As emerging economies seek to improve their standard of living, energy demand grows.

“I think the combination of those two is naturally leading to more energy demand,” Fernandez said. “Now, whether that’s satisfied through traditional fossil fuels or renewables, that remains to be seen. In our view, it’s going to be a combination of the two.”

“I think there’s a misperception in the public that all of the sudden [electric vehicle (EV)] penetration is going to translate to zero oil demand,” he added.

EV penetration has had significant setbacks, however, and waning demand has caused production to slow.

Otherwise, Fernandez pointed to ongoing demand for the building blocks of modern civilization: steel, cement, fertilizers (ammonia), and plastics. The production of fertilizers and plastics relies heavily on hydrocarbons. Additionally, transportation, including marine shipping, jets, and heavy trucks, continues to support long-term oil demand.

Plains All American’s Role in the Midstream Space

At the end of the day, it’s very difficult to pinpoint exactly when oil demand will peak. However, in Plains’ view, demand will continue for decades to come.

“The nice thing about Plains is we’re sitting in the sweet spot in terms of really where the growth basins are between Canada and the U.S., in particular in the Permian, in order to satisfy that oil demand,” Fernandez said.

Plains is a North American energy infrastructure midstream player, with a liquids focus, and about half of its EBITDA comes from the Permian Basin. The company interestingly has two tickers, PAA and PAGP.

PAA and PAGP have equal voting and the same distribution, with the key difference being the tax structures. While PAA is an MLP (issuing a K-1), PAGP is an up-C structure (1099 tax entity).

With its third-quarter results, Plains raised full-year 2023 guidance and is recommending its board approve a $0.20 per unit, or 19%, increase for its next distribution, which will be paid in February.

See more: “3Q23 Midstream Dividend Recap: MLPs Bring the Growth

Investors can get exposure to Plains via an ETF in two ways.

PAA is a top holding in the Alerian MLP ETF (AMLP). AMLP’s underlying index is a capped, float-adjusted, cap-weighted composite of energy infrastructure MLPs.

Meanwhile, PAGP is a holding in the Alerian Energy Infrastructure ETF (ENFR). ENFR’s underlying index is a composite of North American midstream energy infrastructure companies. The index includes MLPs (25%) and corporations (75%) engaged in the pipeline transportation, storage, and processing of energy commodities.

For more news, information, and analysis, visit the Energy Infrastructure Channel.

vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and ENFR, for which it receives an index licensing fee. However, AMLP and ENFR are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP and ENFR. 

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