In the rough and tumble of the chaotic markets in the last few months, it is entirely possible that you missed out on an important trend. Pure-play oil refiners did incredibly well and have ended up as multi-baggers in the stock markets.
MRPL and Chennai Petro
In a sense, they have become a virtual representation of how stocks can get the better of bad markets. Since the start of 2022, MRPL is up 3-fold while Chennai Petro is up more than 4-fold. Now, that is hardly normal returns in the midst of one of the most volatile market conditions seen in the last few years. What has gone right with these two oil companies and why have they turned out to be such stunning performers.
All about Singapore GRMs
One of the most important measures of profitability for an oil refining company is the gross refining margin. It basically shows how much the refiner is earning per barrel of oil. The global benchmark is the Singapore GRM and that has seen one of the sharpest spikes in memory. From $2/bbl in June 2021, it rallied to $8/bbl in December 2021 and by June 2022 it has grown 3-fold to $25.2/bbl. This is the highest level of GRM ever seen in the Singapore benchmark and is rolling huge profits for the oil refining stocks. MRPL and Chennai Petro, being pure refining plays, have gained the most out of this surge in global GRMs.
What is it about pure refiners?
Many of the pure refiners find their business in a sweet spot. To understand that, let us first look at the large players like BPCL and IOCL. They have refining and marketing as their core business. But, retail prices have not been raised in sync with the spike in crude prices. As a result, the marketing margins have been sharply compressed. Companies like IOC and BPCL have been giving up their GRM gains due to thinner marketing margins so net gains are minimal. On the other hand, pure plays like MRPL and Chennai Petro got the full benefits of the refining margins. That explains why they outperformed in the year 2022.
Not exactly sustainable
Is this trend sustainable? Not exactly, since the record GRMs were a result of the shortfalls in refining capacity caused by the Russia-Ukraine war. Once things settle down, it should be back to more normalized levels of GRMs. Then, the advantage that MRPL and Chennai Petro currently enjoy may nor sustain. The real challenge will be for the refining cum marketing plays like IOCL and BPCL where the GRMs will come down but the marketing margins will still be under pressure. In fact, at record levels of $25.2/bbl, the best of the GRM story may be over even for the pure refining plays. It would be rather late in the day to enter the story at this point. Gains may have more or less peaked out!