Three Ways to Play in Water

The Ancient Mariner’s lament of “water, water everywhere but not a drop to drink” has a corollary in the investment world, which goes something like, “water is the most vital element on the planet but it doesn’t seem to be worth anything.”

That’s not to say one can’t make money selling it, especially in the bottled form in fancy packages, mostly to people who could get the same thing for free. No, the real challenge is building a profitable business providing the wet stuff to people, places and industries who are in dire need.

In fact, the threat of water shortages is one of the largest threats facing the world today and to try and spread the word of how severe this crisis could become, a recent report from Barclays set out to explore how energy companies and public utilities can help alleviate water shortages, improving water quality through new technologies and better practices.

According to the report, only 2.5% of the world’s water is fresh, yet in the US around 90% of water withdrawals are used for public and industrial use, with an estimated $1 trillion water investment in the US alone over the next five years.

Going forward, companies will have to think about how they can improve their water usage and reduce the impact water withdrawal has on the rest of the world. Thermoelectric power and irrigation are the two largest consumers of this most valuable resource, accounting for 77% of the water used by businesses within the United States every year.

These companies not only withdraw more water than others, but the way they use the water is significant. For example, the utility industry has large water withdrawals compared to other industries, but much of this water is returned to the water cycle. Meanwhile, the oil and gas sector may not use as much water as other industries, but it’s water use is significant as a lot is wasted.

There is also an enormous lack of basic drinking water in many places, especially emerging markets. Desalinization plants are one of the primary methods being used to convert undrinkable seawater into freshwater. Recycling water is another method being used to ensure the world does not run out of fresh water.

Portable water reuse technologies are starting to help with the goal of recycling more water. Although the treatment technology for reuse is proven, regulatory hurdles and public acceptance are some of the largest obstacles, and only a handful of examples of potable reuse exist in the US.

Water recycling and reuse is just one element of the way the world is adapting to ensure a water catastrophe does not unfold. Other technologies making a difference are advanced metering infrastructures (AMI), which are also known as smart grid and electronic metering systems. Already widely practiced in the electric utility industry, water companies are beginning to adopt AMI to improve accuracy in billing and evaluate consumption.

Three Water Plays 

While there are many small private companies working on new technologies, the three biggest and best ways to play this increasingly important industry is with the established publicly traded companies.

My top three picks are American Water Works (AWK), Tetra Tech (TTEK) and Watts Water Technologies (WTS).

AWK is the most conservative, as its roots are in the legacy utility business, but it has been investing in new technologies and also looking to bring its expertise into overseas expansion.

TTEK focuses on the design and engineering of infrastructure and provides analysis of use and impact studies. Most of its business is located on the west coast agriculture and energy, but it is started to expand overseas.

WTS is more leveraged to residential, which provides high margins but can leave it exposed to U.S. real estate market. Its potential upside will come from new technology that can be brought to untapped emerging markets.

Together the three provide a mini but well diversified portfolio to the most important element on earth.

— The Option Specialist

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About the Author: The Option Specialist