Fresh Water: California Drought Reveals the "New Oil"
by David Fessler, Advisory Panelist, Investment U
Friday, February 6, 2009: Issue #930
A few weeks ago, during a particularly bad cold snap, we had a pipe freeze underneath our 200-year-old farmhouse, causing us to go without water for a few days. I eventually managed to unfreeze the pipe, but there was no question it was disruptive for a busy household of four.
Here in the United States, we don't realize how much we take our fresh water supply for granted, until it's suddenly cut off. We're used to turning on the faucet and there it is.
But for the folks in California, 2009 is shaping up to be a big fresh water disaster in the making. Last Thursday, state water officials reported that the snow pack in the Sierra Nevada Mountains is only 61% of what is considered normal for this time of year.
An with only eight weeks left in the rainy season, significant rain and snow is needed for the next two months in order to divert a disaster.
That's on top of back-to-back dry years in 2007 and 2008. The situation is so bleak, officials may be forced to ration water on a statewide basis for the first time since the 1990s.
Lester Snow, the Director of California's Department of Water Resources, put the situation in perspective: "We may be at the start of the worst California drought in modern history. It's imperative for Californians to conserve water immediately - at home and in their businesses."
The fallout has already hurt the wild salmon population, and if the drought continues, it will get even worse. Farmers, who use 80% of California's water for irrigation, will have to cutback on the number of acres they plant. That will have a devastating impact, as agriculture is one of the most important sectors of California's economy.
Fresh Water: The New Oil
Fresh water has been talked about as the "new oil," but it's far more important. The human race can survive without crude oil, but not without water. We can't live more than a week without it.
And for that reason - unlike oil - it is completely immune to demand destruction. We need a pint a day, on average, to maintain a healthy existence. If you include the amount used to produce our food, the number jumps to nearly 1,000 gallons per day per person, and even more in countries whose citizens eat a lot of meat.
The main problem with oil is finding more of it. With water, it's the distribution system that's the issue, as it primarily flows through pipes. Many were installed when Edison was fooling around with electricity.
While California has its own set of special problems when it comes to water and its distribution, the problem is monumental nationwide:
- 650,000 miles of antique water pipes are in need of repair or replacement.
- Nearly 30% of the water infrastructure in New York City - and most other big metropolitan areas in the east - dates back to when Lincoln was president.
- Many of the nation's water purification facilities are more than 50 years old, and completely outdated.
But don't think the United States is alone in this dilemma. China has lots of water, but much of it is polluted or untreated. Roughly 300 million of its 1.3 billion people don't have access to clean drinking water out of the tap.
China is spending tens of billions of dollars annually to try to fix the problem.
2 Ways to Play the Coming Water Boom
While the recession has consumers hunkering down - and cutting back their purchases of computers, cell phones, toys and other discretionary items - it hasn't decreased their demand for clean, fresh water.
And one of the biggest companies in the world that's able to provide the infrastructure to deliver it is Veolia Environment (NYSE: VE). It provides bumper-to-bumper environmental management services for both water and wastewater.
Whether it's supplying clean water, recycling wastewater, or developing waste conservation systems, Veolia has a solution.
In China, it's operating freshwater plants, wastewater decontamination and recycling plants and sewerage treatment facilities.
And now you can add some shares to your portfolio at more than a 75% discount to what they were trading a year ago. Veolia currently trades with a P/E of 8.8 and sports an 8.1% dividend yield.
A different, but no less lucrative, way to invest in water stocks is the Calgon Carbon Corporation (NYSE: CCC). Calgon is a manufacturer of activated carbon granules, a material that's essential in many of the world's water purification systems and over 700 other liquid purification and odor control applications.
Carbon granules remove impurities from water, air and many industrial processes.
And business is booming for Calgon:
- The company's shares are up over 200% since September 2006, and worldwide demand is continually increasing for its products.
- Sales in 2008 were $351 million, with roughly 62% of that coming from the Americas, and only 7% coming from Asia.
Clearly the opportunities for the company are enormous. This past year, the company signed a contract with the Jiaxing Jiayuan Water Company to provide 1.1 million pounds of carbon granules for water purification.
James Fishburn, Calgon Senior Vice President, commented on the significance of the order: "Over the last 40 years, Calgon Carbon has supplied millions of pounds of activated carbon to municipalities all over the world, and we are committed to serving the rapidly growing markets in China."
In summary, both companies mentioned above are addressing a market that will be rapidly expanding for the foreseeable future. Fresh water is clearly the new oil. And now's a great time to make it part of your infrastructure and energy portfolio.
Today's Investment U Crib Sheet
As our resident energy and infrastructure expert, Dave gives us the best ideas with which we can successfully profit from these sectors. And with our new administration making lots of changes to "business as usual," Washington just might start improving its record - making energy and infrastructure a great deal. Here are some of his best ideas from the past few weeks:
- The U.S. Department of Energy's Weatherization Assistance Program (WAP) has provided help to 5.6 million low-income families - enabling them to permanently reduce their energy bills. Part of Obama's new energy plan revolves around expanding this program to the 28 million homes eligible for help. He gave us three energy investment opportunities that are perfectly placed to provide the products and services to make this happen.
- It's ironic that the most powerful nation in the world ranks twenty-fifth when it comes to broadband penetration. Indeed, only a little over 50% of American households have high-speed Internet connections. Compare that to South Korea, which has a broadband penetration of nearly 90%. Obama wants "true broadband to every community in America." And that's a lot of opportunities to profit handsomely from those upgrades. Find out the seven ways to profit from our country's biggest infrastructure need in Broadband Penetration.
- While the slowdown we are experiencing is nowhere near as severe as the Great Depression, the solution could be the creation of similar New Deal programs with massive government investments in domestic projects. More specifically, developing energy savings, making alternative forms of energy our mainstream sources, and building the green infrastructure to support what will be our growing energy independence. Here are some of the top companies that money could go to, find out more in Obama's Economic Fuel.