T. Boone Pickens Invests in Water - Should You?

If legendary oil investor T. Boone Pickens is as successful investing in the water industry as he was investing in oil, it may pay to follow his lead. Chris Mayer of Daily Wealth recently wrote the following article ("A Refreshing Idea") about the emerging demand, shrinking supply of usable water and the profit potential of investing in water rights.

He’s a member of the coveted Forbes 400 with an estimated net worth of over $2.7 billion. The Oklahoma native built a fortune on buried treasure - namely, oil and gas. He is the founder of Mesa Petroleum, which he started for $2,500. In its first year, it netted $435,000 in profits and eventually became a billion-dollar enterprise. He was also involved in a bunch of hostile takeovers of oil and gas companies - Gulf, Phillips, and Unocal.

Now 78, the old billionaire has a new buried treasure he’s accumulating - water rights.

Do you have a guess who this cagey guy is?

He’s T. Boone Pickens. Yes, that T. Boone Pickens. And he’s gobbling up water rights in Texas.

Pickens’ new company, Mesa Water, has been buying up ground water rights in Roberts County, Texas - 200,000 acres in all. He says that over a 30-year period, he expects to make more than $1 billion on his investment of $75 million. (Which means he'll be able to buy himself a very nice present for his 108th birthday!)

Pickens wants to take the water from the Ogallala Aquifer and pump about 200,000 acre feet of groundwater annually to El Paso, Lubbock, San Antonio, or Dallas-Fort Worth - for a price, of course.

This price would depend on how far the water needs to go. El Paso would pay around $1,400 per acre foot, while Dallas would pay $800 and San Antonio more than $1,000.

Acre feet, by the way, is a common industry metric. Basically, an acre foot of water is the amount of water required to flood a plain of 1 acre to a depth of 1 foot. Generally speaking, 1 acre foot of water can support two families of four for one year.

Pickens has no qualms about charging people for water and has a ready quip for those who think it wrong to do so. “I know what people say - water’s a lot like air. Do you charge for air? ’Course not; you shouldn’t charge for water,” says he. “Well, OK, watch what happens. You won’t have any water.”

Of course, Pickens is right. Many others are coming to the realization that water is too cheap. Hence, water rights are a great buy today.

As an individual investor, you can’t trade water rights very easily. But you can invest in a company that owns almost as much water as Pickens does - and actually, the acre feet that this company owns are more valuable than what Pickens bought. MUCH more valuable...

I’m talking about PICO Holdings (PICO).

The Rio Grande isn’t as grande as it used to be, and the Colorado River now turns to dust before reaching the Gulf of California. The once-plentiful sources of water in the American West aren’t as plentiful as they used to be. So it's little wonder that water rights are becoming a hot commodity.

I think the value of water rights in the West will continue to soar, which is why I’m fond of PICO Holdings (PICO). The company owns 134,130 acre feet of water rights in Nevada and Arizona, plus a small amount in Colorado. In the pipeline, so to speak, the company seeks approval for an additional 42,800 acre feet of water in its Nevada lands. The company is constantly looking to acquire new water rights. It does this by legally establishing water rights in property it already owns, or by purchasing outright already established legal water rights.

Of all the places to own water rights in this country, you could choose no better than Nevada and Arizona. That’s because these states have among the highest population growth rates in the country and, subsequently, also have among the highest new home construction - both are incredibly bullish for the value of water rights.

To give you some idea of the value, let’s look at recent transactions. Keep in mind, though, that like other types of real estate, these numbers are not comparable across the board. In other words, water rights closer to end-users are worth more than water rights that are far away. Also, senior water rights are the most valuable kind. In some cases, there are several water rights on the same water resource. In these cases, the most senior right is the most valuable - because in the event of drought, it’s the last water right to go.

With those caveats in mind, let’s look at a couple of transactions. In Nevada, Vidler and Lincoln County made a sale for 2,100 acre feet of water for a price of $7,500 per acre in October 2005. In Coyote Springs, also in Nevada, water rights sold for $6,050. In Arizona, Harquahala Valley water rights sold for $2,200 per acre foot.

That gives you a sense for the range. How high can prices go? Well, over the next few years, I wouldn’'t be surprised to see water rights climb to $10,000 per acre foot in the arid states of Nevada, Arizona, and New Mexico.

But before getting too far ahead of ourselves, let’s take a look at PICO’s current value. Assuming a value of $3,500 per acre foot for its water rights, times 134,130 acre feet, you get about $469 million, which is greater than PICO's current enterprise value. But this figure does not include the 42,800 acre feet in Nevada that PICO expects to obtain.

Another point I should make is that PICO also owns a storage facility capable of storing up to 1 million acre feet of water. Currently, the company is buying water and storing it. The company has stored the equivalent of about 90,000 acre feet of water. I haven’t counted any of this, which could bolster the valuation even further.

And of course, I haven’t said anything about its investment portfolio or land and other interests. But you can see the margin of safety in this stock.

Now let’s go back to those water rights for a minute. Based only on PICO’s existing water rights of 134,130 (and ignoring any rights that it expects to obtain), every $119 per acre/foot increase in the value of its holdings would add $1 per share to the value of PICO stock.

So if you start to play around with projections and make some upward adjustments on the value of water rights over the years - well, you can really get some ridiculous numbers. At $10,000 per acre foot, for example, PICO’s existing water rights would be worth $84 a share!

T. Boone Pickens thinks he'll earn $1 billion on his $76 million investment - or basically 13 times his money. PICO - already in this business, with substantial expertise and a portfolio of more valuable water rights - could do even better.

Looking at the chart of PICO (below), it looks like water rights investing is crossing the radar of more investors. The stock recently broke out from a one and a half year base to a new all time high. The breakout was accompanied by very good volume, indicating good momentum and strong potential for future gains in the relative short-term. However, I'm sure the positive Daily Wealth article had something to do with the recent surge. This is a thinly traded stock and prone to big movements following an article from a popular newsletter like Daily Wealth. What I'd do is look for the stock to digest these gains a bit and return closer to $36-$37 before considering a position.

Comments

[Jeffrey Todd:]

T-bone is a great invester however his latest stance on oil futures has cost him millions. PHO power shares water is a better bet in my opinion. This market trend cycle favors utilities.

2007 Jan 18 01:28 AM

[aavkmcg@aol...:]

I like this guy already, at least hes making moves, I'd like to invest in his company, its sounds great so Far ...Lets see.

2008 Jul 08 06:39 PM

[stbp:]

Decreased water is due to gluttinous consumption. You do not even address the real issue. You simply advise to increase wealth to a few. Conservation now, not investment and exploitation later. Your interventions on water is part of the problem and certainly not any part of the solution.
Duane

2008 Aug 07 04:37 PM

[User 271598:]

Duane,

Couldn't have said it better myself. Everyone here is thinking "Hey, we can make ten grand off of every eight people in these states" instead of "Hey, every eight people in these states aren't going to be able to pay ten grand for the water they need every year."

Nice, first a housing crisis then a water shortage...way to put people on the street then thirst them to death. Something about twisting a knife and a back...

2008 Sep 27 10:04 PM

[wayoung9@ao...:]

If someone would have told me 15 years ago I'd be going into 7-11 to buy a 16oz. bottle of water at $1.25 (= $10.00 a gallon). I would have told them they were nuts. Thats 2 and a half times the price of gas today. Maybe Boone is on to something. I wonder how much it will be worth 30 years from now.

2008 Oct 07 11:28 PM

[User 289125:]

I purchased a natural flowing artesian spring 10 years ago when it became quite clear to me that it would eventually be a sought out commodity.

It has been tested by Engineers, etc. and the reports show that there are no contaminants, pure H2O that has an average flow of 48 gal/min or 69,120 gal/day or 25,228,800 gal/yr. and over 250 million gallons have flowed away since I've owned the spring.

I would be interested in Partnerships/Ideas to perfect a team to develop a viable water business.

[e-mail]

2008 Oct 31 01:54 AM

[barrie harrop:]

try windesal.com we can drought proof Texas Communties.

Jan 24 09:39 PM

[ac11360@hot...:]

PLEASE HELP!!!! We feel like Daniel Boone at the Alamo!!! My family and I have managed to hold off the powerful water gobbelers due to the fact of what is under our property. An Aquafer that divides into three river heads and instead of doing legal business, they have chosen to set up horrific rouses. We are depleted of monies at this time, but the mention of contacting you apparently sent shock waves thru their bodies. Their adjenda apparently is of no moral values or of consciousness. Since we are related to Daniel Boone, we are not giving up the Alamo without a fight(war). If you are interested in talking to us, please contact us thru our e-mail. What I understand about Florida mineral rights, we own our water and feel that our location can be an future asset to the country. We are running low on ammo, please help!!!!!

Mar 11 02:45 PM