Analysts with Citigroup Global Markets see a future in which water is an asset and water-related securities are traded widely on global exchanges.
Investors should focus on water-related companies that own high-end technologies, firms that treat water generated when fossil fuels are extracted and those that remove salt from sea water, the analysts said, summarizing a conference about climate change and water investment.
Those changes will help fuel growth of 4 percent to 6 percent over the next year for the $450 billion industry, despite the economy's sluggishness, the analysts said in a research note published Tuesday in connection with the Citi Global Water Conference in London.
The U.S. has fallen behind on investment in water infrastructure, economists and business leaders say. The nation must spend about $335 billion by 2026 to maintain access to supplies of drinking water, researchers at the University of Oregon's Lundquist College of Business noted in a paper this summer.
One possible way to pay for that investment: Financiers might bundle future income from water rate payments into a tradable, asset-backed security, the paper's authors suggested. Utilities could sell off the securities to fund infrastructure investment. Such investment would fuel demand for equipment and materials used to transport and treat water, boosting revenue for companies that produce them.
By allowing investors to trade water payments, the process also would bring the price of water closer to its costs, economists say.
Among the fastest-growing areas of existing demand is for treatment of water produced when oil and natural gas are extracted, the analysts said. Underground energy reservoirs generally lie above a natural layer of water. Additional water is produced as drillers inject fluid into the ground to force out oil and gas.
Such water is considered industrial waste, but it can be reused for further energy production or treated until it is clean enough to satisfy environmental regulations.
Rising demand for this expertise has boosted companies such as Heckmann Corp., which this year completed a 50-mile water disposal pipeline to treat and dispose of up to 100,000 barrels of water per day from the Haynesville Shale deposit under northwest Louisiana and east Texas.
Another chunk of the water industry's growth will come from water reuse, as regions with limited access to fresh water make the most of scarce resources, the analysts said. One panelist described opportunities to capture water from wastewater and industrial waste in markets such as chemical processing, food and metals and mining, they said.
Investment in water treatment and distribution infrastructure has been tempered so far by prices that are too low to reflect the true cost of water, the analysts noted. Citi Chief Economist Willem Buiter expects to see more investment in these areas as water is handled more like other global commodities.
The underpricing of water helps explain why its use in agriculture is so inefficient, the analysts said. Agriculture accounts for 70 percent of global water use and half of that water is wasted, they noted. They called agricultural waste the "low hanging fruit" for water conservation.
More saltwater also is being processed into drinkable water as desalination technology becomes cheaper and more energy-efficient, they said. Companies such as Hyflux Ltd. and IDE Technologies Ltd. are at the top of this field, the analysts said. Neither company trades on a major U.S. exchange.
The analysts recommended investments in multi-industry companies such as Pentair Inc. and Danaher Corp. Citi has "buy" ratings on both stocks. They also signaled some interest in the water division of ITT Corp., which is set to be to be spun off later this year.
Shares of Heckmann, which treats water used to extract natural gas and sells bottled water in China, fell 15 cents, or 2.5 percent, to close at $5.75 Wednesday.
Shares of Aqua America, the U.S. water utility company, fell 6 cents to $21.30. Shares of American Water Works Company Inc., a large water service provider, finished unchanged at $28.75.
Danaher Corp., which makes industrial instruments that measure water purity, fell 19 cents to $51.75. Pentair Inc., which makes equipment to move, store and treat water, gave back 22 cents to $37.25. Pall Corp., a specialist in filtration and purification, fell 40 cents to close at $52.92, but gained 8 cents in aftermarket trading following the release of its third-quarter earnings.
ITT Corp., which makes water pumps, valves, control systems and other equipment used in water treatment, declined 22 cents to $54.35. The Dow Chemical Co., which makes chemicals used for water purification, fell 31 cents to close at $34.87.