Assessing the ESG roadmap for JUs; prospects ahead

Velesto is our key pick for drilling plays

Velesto is our key pick for an exposure to ASEAN’s drilling ops play, ahead of Icon and PVD. The company stands out for its: (i) operational and financial strength, (ii) sustainability agenda and (iii) valuations.

Velesto: Ahead of its peers in the ESG drive

Velesto (a component of the FTSE4Good Index Series and a winner of the ASEAN Corporate Governance Scorecard awards; under the ASEAN Asset Class Award category) is ranked 1st in our ESG scorecard, under the ASEAN drilling segment. It is notably ahead of its peers (Icon & PVD) in the ‘E’ pillar; in terms of “E’ disclosures (i.e. collection of key natural capitals, a more systematic/ consistent date-gathering approach). Its upcoming ‘E’ KPIs would involve establishing more comprehensive shortto
medium-term carbon management targets (i.e. setting baseline, emissions reduction goal, biodiversity preservation), a positive.

Maersk Drilling: The industry’s ESG gold standard

That said, Maersk Drilling leads in the global ‘E’ standing, in terms of emission targets, progress and ambitions on its sustainability roadmap. It has the most ambitious climate action plan with regard to CO2 reduction targets, in decarbonising drilling activities. It targets to: (i) cut relative greenhouse gas emissions (GHG) by 50% by 2030, (ii) invest in carbon
capture and storage (CCS) projects; to have the first well ready for injection by 2025, with the longer-term goal to develop capacity storage of 3.5m tonnes CO2 p.a. by 2030 and (iii) use biomass waste as fuel to produce syngas and generate carbon-negative emissions.

Strengthening financials and liquidity position

Overall, (i) optimising fleet utilization and (ii) strengthening their financial and liquidity positions will continue to be the immediate priorities for drilling operators worldwide. The drilling market is seeing a gradual revival, on the back of the strength in oil price. In essence, JU drilling operators are set to capitalize on rising demand and supply tightness in the market. To-date, marketed JUs’ utilization has improved by 12-ppts YoY to 79% now. Ageing rigs are progressively scrapped (52 units over the past 24 months) and taken off-market permanently. Further tightness and increase in utilization (above the 80% threshold) will soon to lead to higher dayrates (our estimate: USD70k for 2021-23; unchanged for now). We observe that tenures are gradually extending
too, from sub-12-months to 1 year and beyond, a positive development.