BLUE GOLD: Here Are The Lucrative Investment Opportunities In Water Today

Drop of water in a glass

Photo: Wikimedia Commons

The discussion surrounding water investing is growing as the global population swells and water becomes an increasingly scarcer commodity.Citi recently held a Water Investment Conference with several panel discussions featuring industry executives and portfolio managers investing in the water space. They released a report with the key takeaways from the panels.

The panelists identified key areas within the water equipment industry that look poised to benefit most from global water trends. 

The water investing movement is only in its very early stages

Marc Robert, who runs an investment portfolio for Water Asset Management, characterised the industry as 'in its infancy.'

This owes to 'massive underinvestment in basic infrastructure over the past few decades,' and therefore presents a sizeable opportunity for investors.

Robert estimated that $500 billion needs to be invested over the next 30 years to keep basic water infrastructure viable, versus EPA estimates of anywhere from $300 billion to $1 trillion.

Source: Citi Investment Research & Analysis

Here are likely the biggest opportunities for water investors

The hydraulic fracturing industry is providing huge demand for water and water services.

Ballast water is only a $1.35 billion market right now but panelists think it should be more like a $30-50 billion market.

Services will need to alleviate water stress (in areas where population growth is booming while water supplies dwindle).

Europe-based water companies represent good value because their businesses are resilient to the macro outlook.

Companies providing analytics and meters will benefit from a growing water industry as a whole.

Source: Citi Investment Research & Analysis

The whole fracking industry is as much a play on water as it is on oil or gas

Every oil well developed by hydraulic fracturing requires 3-5 million gallons of water as part of the process.

20 per cent of this water can be re-used for more fracking, but 80 per cent of the water becomes 3-10 times saltier than seawater.

Desalination methods are still costly but the fracking industry will provide plenty of demand for development of these technologies in the future.

Source: Citi Investment Research & Analysis

Desalination technology will likely become cheaper than other water disposal methods

Right now, in most shale development areas in the U.S., companies have to take that used, salty water to a proper disposal well, which can often be hundreds of miles away from the fracking site.

The transportation costs of hauling millions of gallons of water for hundreds of miles add up quickly, only increasing the demand for cheaper desalination technologies.

Source: Citi Investment Research & Analysis

If you own water rights, supplying to frackers is way more lucrative than your usual customers

Mark Harding is the CEO of Pure Cycle -- a company that owns over 27,000 acre feet of water rights in Colorado.

At the conference, Harding 'indicated that water for fracking use can fetch $3000 per acre/foot vs the roughly $50 per acre/foot that a farmer has typically paid.'

Thus, the hydraulic fracturing industry provides significant demand not only for water treatment, but for water itself.

Source: Citi Investment Research & Analysis

The market for upgraded water ballast systems could be huge...

Citi calls ballast water treatment systems 'one of the newest and largest standalone markets in the water industry.'

The market for ballast water treatment systems could be anywhere from a $10 to $50 billion opportunity.

Companies will have to focus on low cost, ease of use, and designing systems that use the least energy and take up the least amount of space onboard.

Source: Citi Investment Research & Analysis soon as a few regulations are adopted and implemented

The International Maritime organisation (IMO) has set standards on ballast water discharge that need countries controlling 35 per cent of the total deadweight tonnage being shipped globally to ratify in order for the standards to become international law.

These enhanced standards would require shipping fleets to upgrade outdated ballast water treatment systems, providing an industry growth catalyst.

Panama is a country to keep an eye on as they control the most tonnage of anyone and are still waiting to ratify the standards.

Source: Citi Investment Research & Analysis

Regardless, shipping companies are already testing out new water ballast systems

The global shipping industry is likely waiting for more clarity on the outcome of the ratification process before investing in upgraded ballast water treatment systems.

Therefore, currently the ballast water treatment industry is still in its early phases.

However, some shipping companies are already testing various ballast water treatment systems as first adopters.

Source: Citi Investment Research & Analysis

The water filtration market is set to outpace the overall water equipment market

Dow Water & Process Solutions, one of the main players in water filtration, thinks it's a $5 billion market for them in the future versus the $1 billion in sales they are currently achieving.

Furthermore, the company sees 10 per cent annualized growth in water filtration versus 4 to 6 per cent growth for water equipment in general.

Source: Citi Investment Research & Analysis

According to the panelists, much of the gains in durability and energy efficiency realised by the membranes used for water filtration are now behind us.

As a result, the panelists said that 'the most likely next changes are to come from 'step function' new technologies rather than incremental tweaks.'

Whereas membranes used to make up around 35 to 40 per cent of the cost of a desalination facility, they now only make up around 10 per cent of that cost.

Source: Citi Investment Research & Analysis

The next big water filtration technology could be 'forward osmosis'

Forward osmosis is only just coming to market, but companies supplying the technology hope it will not only be more energy efficient, but also be able to recover more fresh water than reverse osmosis (RO).

One such company, Oasys Water, sees their 'potential addressable market for forward osmosis at $7 billion including $1 billion from industrial wastewater, $2 billion from RO concentrate recovery, and $4 billion from municipal.'

Source: Citi Investment Research & Analysis

Developed economies are massively underinvested in water infrastructure

Citi says that 'chronic underinvestment has created pent up demand for water infrastructure in developed countries,' but that due to strained government budgets, they are still 'awaiting a catalyst to unlock funding and speed along projects.'

However, emerging markets are still set to push the water infrastructure industry forward.

Source: Citi Investment Research & Analysis

However, there are some good opportunities for water infrastructure investment in the US

California is an area of high water stress in the U.S. due to a growing population and a dwindling water supply.

Texas is seeing a boom in oil and gas drilling, which is heavily water-intensive and will require transfer systems to be built to get water to the project sites.

Citi says panelists identified Southern Florida as 'an important long-term growth opportunity due to past under-investments in wastewater treatment.'

Source: Citi Investment Research & Analysis

Water reuse hasn't caught on yet but it will eventually

Current water treatment systems are able to treat wastewater back to drinking water quality.

Citi gives one example of this water reuse, saying that 'water travelling down the Mississippi River is consumed, treated, and reused roughly 25 times before it reaches New Orleans.'

However, most areas of elevated water stress still haven't shifted to water reuse systems except in places like Singapore and Southern California, where it has finally become a real necessity.

Source: Citi Investment Research & Analysis

Three key themes will drive water investing going forward

The water-energy nexus: Hydraulic fracturing and oil drilling require increasing water inputs. Wastewater itself can provide a new source of energy. Current water treatment methods can be made more energy efficient.

Ability to scale up in size: Panelists said that scalability was key for the development of future water treatment systems, and Citi says that 'this mentality vs. highly customised systems' means suppliers will be able to sell more systems.

Water reuse technology: Once consumers get over the 'yuck factor' of the 'toilet to tap' reputation, panelists think this could be a great opportunity in highly water-stressed areas. Citi calls water reuse a 'Next Big Thing.'

Source: Citi Investment Research & Analysis

Here are Citi's top water investing ideas and the companies best exposed to them

Jefferies has some more ideas for how to invest in water

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