MRPL and Chennai Petro gain from record Singapore GRMs

Amidst all the volatility in the stock market, two stocks have been consistently hitting new highs. Both Mangalore Refinery & Petrochemicals (MRPL) and Chennai Petroleum Corporation (CPCL) have been touching new 52-week highs almost on a regular basis. The table below captures the gist of how the two stocks have rallied in the last few months. 
 

_{Data Source: NSE (closing price as on 08th June 2022)}

Clearly, both the stocks have rallied frenetically in the last 1 year with CPCL almost rallying 4 fold since the start of 2022 and emerging as the top performer among the mid-cap stocks. From the lows of the last one year, both stocks are sharply higher and are hovering closer to the peak of the last one year. What exactly has driven this frenetic rally in these stocks. Is it just about strong crude prices or is there more to the story of MRPL and CPCL.

Let us look at Chennai Petroleum first. This company operates in the downstream petroleum sector. CPCL is into the manufacture of an array of value-added petroleum products.

Chennai Petroleum has been one of the big beneficiaries of the spike in the gross refining margins of the Singapore benchmark, which his used as the global standard. That has spiked to an all time high of $25.2 per barrel, a level not seen in the past.

GRM is the amount that refiners earn from each barrel for turning crude into refined oil. The spurt in demand for refined oil has resulted in a surge in gross refining margins and that is what the Singapore GRM benchmark is reflecting.

Singapore GRM was just about $8.1/bbl in the March 2022 quarter. However, in the June 2022 quarter the Singapore GRM has averaged above $20.1/bbl. On a YoY basis, Singapore GRM is up nearly 10-fold.

Let us now turn to the other company to benefit from the spike in Singapore GRM, i.e. MRPL. As is well known, MRPL is engaged in the business of refining crude oil, and is a subsidiary of ONGC. In fact, ONGC holds 71.63% stake in MRPL.

As a pure refiner of crude, MRPL has gained because unlike the other refiners like IOCL and BPCL, MRPL does not have to worry about the compression in marketing margins due to the government not allowing price hikes. For IOCL and BPCL that has depressed their stock market performance.

This is likely to benefit both MRPL and CPCL and that is already evident in their quarterly numbers. The market price of these stocks is reflecting the positive lag impact of the record GRMs at the Singapore benchmark.

In a sense, the spike in GRMs is due to Russian sanctions, shutdown of refineries and constrained exports. That can change drastically once the war comes to an end and supply lines are restored. For now, however, the refiners are making the best of the record GRMs globally.

The reason CPCL and MRPL have gained the most is that they are pure play refiners and stand to benefit the most from the spike in the Singapore GRMs. For the integrated downstream players like IOCL and BPCL, the record Singapore GRMs will at best offset the weak marketing margins of these companies. For now, the story is all about the pure play refiners. That is where MRPL and CPCL are making hay.