Positioning for When Water Runs Out: Part II

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 |  Includes: AEGN, AMN, BWEL, CCC, CGW, CWT, DGWIY, DHR, FIW, FLS, GE, HYFXF, IEX, ITRI, LAYN, LNN, MFCB, MWA, PHO, PIO, PLL, SBS, SZE, UU, VE, WTS
by: Joseph L. Shaefer

In Part I of this series, I discussed some of the global trends in freshwater availability and drinkability. It is nothing less than amazing to me that somehow 6 billion people sustain life on the roughly 1% of the earth’s water that is not salt water or brackish water (comprising about 97.5%) or encased in polar and glacial ice (about 1.5%).

An important industry has developed around this fact to treat, clean, and transport this water from its various sources to where people drink it, shower in it, irrigate their fields with it, and use it in literally thousands of manufacturing and agricultural applications. Because of the limited supply, much of this “waste” water is then purified, cleaned, and recycled for use again. But we can only refresh, re-use, and recycle so much.

We have not yet reached the point of recycling all waste water like the Fremen of Arrakis in Frank Hebert’s brilliant novel Dune, but if we are consigned to endlessly squabble over that fixed 1% in a world where population is anything but fixed, many will die and many more will suffer.

Already, lack of water (or dirty water) is by far the largest disease problem in the world; only 20% of the world's population enjoys the benefits of indoor running water; and every year, the amount of global water polluted equals the water consumed.

It seems logical, then, to seek additional sources of drinking, cleaning, irrigating and manufacturing water from the 97.5% of the world’s water in the oceans, seas, and salt-water lakes. But there are problems a-plenty in doing so.

First, there is no way you can do the job halfway. I have been a diver for more than 40 years, and I love being in salt water. I like the feel of it, I like the smell of it, and I think of Salt Water as one of the five best doctors in my life. (The others are Fresh Air, Sunshine, and my Right Leg and my Left.) But make no mistake: if you drink it, salt water will kill you.

Salt water in nature isn’t just the teaspoon of NaCl table salt you pour in a glass of warm water to gargle when you have a sore throat. Salt water in ocean and sea is composed of all kinds of elements and minerals we call “salts”: epsom salts, potassium salts, iodine salts, and lots more. Ocean water is about three times as salty as your blood. If you drink ocean water directly, water will flood out of every one of your cells in a fruitless effort to dilute the salt. Since all cells need water, this outward flood leaves them perilously dehydrated. Drinking salt water results in seizures, unconsciousness, brain damage, and finally, as the overwhelmed kidneys shut down, death.

Yes, but. Man is a wily creature and every now and again uses his brain for something besides figuring out how to destroy his nation’s economic system or finding new ways to destroy other inhabitants of the planet.

Desalination using reverse osmosis membrane technology has become a viable option for the development of new water supplies. You may be surprised at the number of countries – and nations – staking their future on desalination.

The largest seawater reverse osmosis plant in the world is at Ashkelon, on Israel's southern coast. It provides over 100 million cubic meters of desalinated water per year at a cost of about $0.60 U.S. per cubic meter. Since one cubic meter equals just over 264 US gallons, and since the average price of water in the U.S. is about $1.50 per 1000 gallons, it costs you and I, living in the States, about $0.40 for a cubic meter.

So what? At less than a penny a gallon, if it went to the penny and a half that Ashkelon produces it for, or the 2 cents plus it sells it for, so what? People don’t complain when gasoline goes up a penny or down a penny. Water is considerably more important, more valuable, more necessary.

Especially to a nation like Israel. Of the world’s water, 1% is available as fresh water, polluted or not. And just 1% of that amount is available to the entire Middle East (yes, including the once mighty Tigris, Euphrates, and Jordan Rivers…). Yet 5% of the world’s people live here. And every major river within the Middle East crosses at least one international border. Is it any wonder Israel chooses not to rely merely on rainwater resident in the Sea of Galilee and the Jordan River, its few aquifers, and recycling? Or that the Golan Heights, which look flat on a 6th-grader’s map, actually provide not just the high ground any military commander seeks, but also greater water security for Israel?

I use Israel as an example, but I could use at least two-score more. The politics of water ensure that freshwater sources will be ever-increasingly in doubt to at least that many nations. Desalination remains the only viable alternative. It may not be too big a stretch to suggest that desalination may prevent more wars than the United Nations ever has. (OK, that would be a single digit, so let us say, the UN, all the world’s religious leaders and all the world’s political leaders…)

The capital investment for desalination is quite expensive – but consider the alternatives. There is no question that, if it were only the money, desalination would sprint forward. Why have nations moved more cautiously? Many have enough fresh water today. Of those that don’t, there are environmental considerations. Removing scores of different salts, minerals and pesticides from brackish or sea water leaves us with the issue of what to do with all that stuff. It can’t be simply pumped back in the ocean. As every long-time diver knows firsthand, we’ve done enough harm to our oceans without adding that insult. So all this stuff, some of it benign in minute and necessary concentrations in the oceans but toxic when concentrated, has to be dealt with.

The initial research, which must be proved out in larger scale analysis, is actually heartening. As the National Research Council recently reported, “Limited studies suggest that desalination may be less environmentally harmful than many other ways to supplement water -- such as diverting freshwater from sensitive ecosystems... Desalination also has raised concerns about greenhouse gases because it uses large amounts of energy. Seawater reverse osmosis uses about 10 times more energy than traditional treatment of surface water, for example, and in most cases uses more energy than other ways of augmenting water supplies. Researchers should investigate ways to integrate alternative energy sources -- such as the sun, wind, or tides -- in order to lower emissions from desalination…”

To which I say, “Hogwash.” These folks are well-meaning but disappointingly misguided, given that the authors are mostly civil engineers. I am 110% in favor of using sun, wind, or tides, but our water problems are pressing now, not in 20 years. Couldn’t we just once plan ahead of a known catastrophe?!! What is available now is nuclear and natural gas, and dirty old coal and oil. You want water? Fess up to the reality that it takes energy, and the energy sources we hope to replace are still the energy sources which we have in abundance -- with a transportation and distribution infrastructure already in place.

Saving my defense of safe commercial nuclear power for another article (!) let’s take a look at the leading companies in water desalination and freshwater distribution, purification and recycling.

The biggest is also the world’s biggest factor in nuclear and a host of other industries: GE. Their Water & Process Technologies Division is the world leader in the supply of seawater reverse osmosis membrane desalination systems. GE also pioneered brackish water desalination in the early 1950s – important to the US where decades of over-fertilizing has left much groundwater brackish at best. And, coincidentally, is no small shakes in nuclear design and development, as well...

One of the smallest players, in terms of market cap but not in terms of expertise or the size of their projects, is Hyflux (OTCPK:HYFXF in the US; the company, like another favorite of ours, Keppel Corp (OTCPK:KPELY), is located in business-friendly Singapore). Hyflux is a water treatment company, building a massive desalination plant in Algeria, but also leading environmental company with operations and projects in China, the Middle East, North Africa and India.

In between the biggest and the smallest are dozens of fine companies. I’ll list a number of these from a recent issue of Investor’s Edge ® without further comment as possibilities for your own research, but will conclude with two recommended by another source that, after doing my own due diligence, I like a great deal.

Here are a few for your consideration: Itron (NASDAQ:ITRI), Insituform (INSU), Veolia (NYSE:VE), Suez (NYSE:SZE), California Water Services (NYSE:CWT), Millipore Corporation (MIL), RWE (OTCPK:RWEOY), Idex (NYSE:IEX), Flowserve (NYSE:FLS), Ameron (NYSE:AMN), Pall Corp (NYSE:PLL), Watts Water Technologies (NYSE:WTS), Mueller Water Products (NYSE:MWA), Danaher (NYSE:DHR), Layne Christensen (NASDAQ:LAYN), old favorite Calgon Carbon (NYSE:CCC), United Utilities PLC (UU), and a new one for me, Duoyuan Global Water Inc. (DGW), which a commenter to our Part I recommended. I haven’t had a chance to do fundamental research on it yet, but the same commenter also recommended SBS (see next paragraph) which I do know and like, so it may be one to put on our radar screens.

Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS), a Brazilian company that provides water and sewage services to a range of residential, commercial, industrial and governmental customers in 366 municipalities in the state of Sao Paulo. It was originally recommended to me by Vivian Lewis of Global Investing, a friend and competitor in the newsletter business who is also a Seeking Alpha contributor. You can see some of her other exceptional work on international issues here.

There are some fine ETFs that specialize in irrigation, piping, desalination, filtration and waste management. They include U.S.-focused PowerShares Water Resources Portfolio (NYSEARCA:PHO) and First Trust ISE Water Index Fund (NYSEARCA:FIW) and more globally-focused Powershares Global Water Resources Portfolio (NYSEARCA:PIO) and Claymore S&P Global Water Index ETF (NYSEARCA:CGW).

(And don’t forget the three favorite companies I mentioned in Part I!)

Finally, I’d like to single out two companies. Both were originally recommended to me by Bob Howard of Positive Patterns, another friend and competitor. (You may contact his company at 417 887-4486 or at positivepatterns@prodigy.net. Mention this recommendation to see a free issue of Bob’s work.)

The first is Lindsay Corp (NYSE:LNN). Remember when you used to drive across country and you’d see these gigantasaurus crop irrigators that spewed water out like a huge lawn sprinkler? You don’t see many of those any more. Now you’re more likely to see what Lindsay makes, self-propelled center pivot and lateral move irrigation systems. These typically move by a computer-controlled mechanism that the farmer can adjust based upon rain, elevation, whether the crops are in a gully or on a rise, and a dozen other variables. Basically, these irrigation systems save the farmer money and save all of us water. The company also manufactures and markets infrastructure products, including movable barriers for traffic-lane management, crash cushions, preformed reflective pavement tapes and other road safety devices. That puts them in two investing sweet spots.

The second is one to put away for your kids. J.G. Boswell (OTCPK:BWEL) is America’s largest cotton grower, a rather water-intensive crop to grow and no fun to pick, I can tell you from experience! BWEL is the country’s biggest cotton grower partly because it is the largest landowner in California. Now that may seem like a booby prize in today’s real estate market but California, for all its idiotic rules and over-reaching paternalism, is still the most geographically interesting state with way more than its share of grandeur and natural beauty. When the economy recovers, and it will, Boswell’s land will be worth way more than its current valuation. Finally, the land and the cotton need not fear the next drought. BWEL owns the rights to 15% of the water flowing down the magnificent Kings River. As long as there’s snow in the Sierras, Boswell has enough fresh, pure (as of today) water. I believe the water alone is worth the price of the stock, with the land and the cotton thrown in for free.

Two caveats, however: First, the stock is expensive in dollars but cheap in valuation. Stocks like this trade in lots of ten shares and an order for twenty can send it up or down 20 points. Buy smart. Second, it’s one of a handful of stocks I hold even though I imagine it will get cheaper in a downturn. Why hold it? Because BWEL marches to the beat of a different drummer. Since I’m buying it as a value play, I’m willing to nibble every time it goes down to 400 and change. If you don’t have this patience, stay away from BWEL!

FULL DISCLOSURE: Long BWEL. And will be long a whole bunch of the others at the right price.

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