Friday, September 15, 2006

Water, Water Everywhere

Day after day, day after day,
We stuck, nor breath nor motion;
As idle as a painted ship
Upon a painted ocean.

Water, water everywhere,
And all the boards did shrink;
Water, water everywhere,
Nor any drop to drink

The Rime of the Ancient Mariner
Samuel Taylor Coleridge

Environmentalists, geologists and meteorologists see water everywhere but apparently are worried about from where their next drop is coming. What has the experts upset is the fact that global water usage increased by six times in the past 100 years and could double again by 2050. Water supplies on the other hand have remained the same. There is also a growing concern over pollution of potable water sources. The United Nations reported three years ago that more than half of humanity will be living with water shortages, depleted fisheries and polluted coastlines within 50 years because of inadequate water supplies and pollution.

What better place for investment than where a problem begs for a solution. Crystal Equity Research, the sponsor of the Small Cap Copy web log, initiated coverage of Basin Water, Inc. (BWTR: Nasdaq) this week. Basin Water is an emerging player in water treatment. Its proprietary ion exchange system is gaining traction among municipalities and other water system owners to remove harmful contaminants from groundwater.

Indeed, I believe water supply and water treatment are likely to gain the visibility of the pharmaceutical or energy industries. Not convinced? Take a sip of your Perrier and read on.

Coleridge was writing about a sailor, the Mariner, at sea in a storm. The voyage takes a wrong turn and the ship runs out of water. The Mariner and his thirsty crewmates looked out over the seemingly endless ocean - 97% of the water on the earth is saltwater - but had not so much as a drop to drink. The remaining 3% of the H20 on the planet is freshwater, but the sailors could not get it because 90% of that (2.6% of the total) is trapped in glaciers and ice caps. That leaves just 0.014% of the earth’s total water for drinking, cooking, animals, crops, and commercial/industrial uses. The sailors had another problem - transportation and storage. Like many isolated communities, they could not get access to water supplies marooned elsewhere.

Are you beginning to feel the pinch? No?

You should be getting quite parched. For all the apparent wealth in water resources and distribution systems, the North American continent is not free of concerns over water supplies. For example, Arizona was named in a World Health Organization report as one of the most threatened areas in the world. Apparently data provided by NASA suggests Arizona will have severe water shortages by 2025. Arizona, as well as about 50% of the rest of the U.S., relies on groundwater. (No, Arizona cannot simply reroute the Colorado River lest it spark a civil war with California and Nevada.) In addition, to growing demand, groundwater users also have to worry about a reduction in usable supplies through pollution from mine leaching, pesticide and fertilizer runoff, and landfill leakage among other sources of toxic substances.

One solution is to use less water - i.e. reduce demand - and to protect existing supplies from contamination. The U.S. Environmental Protection Agency says about 45% of the fresh water supply in the U.S. is used for thermoelectric generation. Another 35% is used for irrigation. Just 20% is used for domestic, livestock, and industrial purposes. The American Water Works Association provides some very interesting data on how consumers use water, including that, among the various uses of water around the home, the largest single use is flushing the toilet!

While much of the world’s water shortage and water quality problems can be solved with more efficient irrigation, better toilets, and pollution controls, there is still a need for water treatment - i.e. increase supply. We believe the looming water crisis presents an opportunity for companies with new and improved water treatment solutions. Desalinization, filtration, and contaminant removal may all be needed to bring fresh water supplies into line with growing demand.

The water supply and treatment area will be a particularly fertile ground for smaller companies, like Basin Water. The water business is highly localized and therefore fragmented, making it possible for a smaller company to distinguish itself with a proprietary product and a focused marketing strategy. Of the thirty public companies in the Crystal Equity Research index of water supply and pollution treatment, only eight are over the $1.0 billion market capitalization level we use as the hurdle for mid-cap status.

Look for future postings with additional names from my list of water supply and treatment companies.

Neither the principal of Crystal Equity Research and Small Cap Copy nor any of its associates own any shares in either BWTR.

1 comment:

Anonymous said...

Larry Ellison mentioned to me the other day that he had seen a research piece put out by Crystal Equity Research and was very impressed. I don't remember who he told me the piece was on... undoubtedly something in technology. But I was pleased you're getting attention from the big guys. Keep up the great work!