This article was originally published on March 1st, 2014 and was updated on Jan. 12, 2017.
Is California in the clear?
Just one year ago, California's water reservoirs ended 2015 in such a sorry state that locals worried it would take 20 inches of new rainfall just "to get to normal" levels in their reservoirs. Fast forward one year, however, and Time magazine recently reporting that the state is enjoying a "remarkable turnaround" after five years of parching drought. According to federal monitors, 35% of California is now officially drought-free.
Still, that leaves 65% of the state still experiencing drought-like conditions. One bad year, and California could be right back where it began -- in the dustbowl.
And this matters to me... why?
Meteorologists say California's recent drought was the worst the state had seen in 500 years. If you live in the state, this has been painfully obvious. But in case you live outside, here's a quick rundown of why California's drought is important to you: More than half the fruit and vegetables sold in America are grown in California's Central Valley. California grows 99% of our pistachios and almonds, and 96% of our tomatoes. Lemons -- 89%. Carrots -- 86%. Lettuce -- 49%. And that's just the start of the grocery list.
With 88% of California experiencing "severe to exceptional" drought conditions during the drought, and 100% of the state "exceptionally dry," these fruits and veggies became harder -- and more expensive -- to produce. California produced $44.7 billion worth of fresh produce in 2013. One year later, $1.5 billion of that had withered on the vine. Experts estimate that the state incurred $2.7 billion in economic losses in 2015, and despite the respite in 2016, lost another $600 million last year.
But here's something that might fix the problem
Faced with a fickle Mother Nature, playing hot and cold about whether it will grace California with water, but sitting right next door to a huge bowl of water, aka the Pacific Ocean, many Californians wonder whether desalination could provide a more reliable answer to their problems.
Desalination is the process of taking ocean salt water and forcing it through a membrane to filter out salts through reverse osmosis -- thereby creating fresh water. It's hardly a new technology, yet only a handful of desalination plants operate in California today -- mostly for private use by industrial companies such as Pacific Gas & Electric.
15 new plants are at various stages of planning, though -- and therein lies the opportunity for investors.
We're from Israel, and we're here to help
In late 2015, one of the biggest of these desalination plants, the $1 billion, 50 million-gallon-per-day Carlsbad Desalination Project, finally came on line. Built by privately held Poseidon Resources, in partnership with Israel Chemicals (NASDAQOTH: ISCHY) subsidiary IDE Technologies, Carlsbad is designed to produce enough water to supply 7% of the city of San Diego's drinking water needs.
As of today,, Carlsbad is the largest such plant operating in the Western Hemisphere. Should all 15 remaining desalination plants be built to similar scale, this would produce enough water to take a city the size of San Diego (population 1.36 million) out of the loop, releasing its water needs for use in irrigation.
Help a bit closer to home
A second company with the potential to slake California's thirst is publicly traded Consolidated Water (NASDAQ: CWCO). Currently focused on the Caribbean, Consolidated Water not only builds but also operates multiple reverse osmosis desalination plants in the Bahamas, Belize, the British Virgin Islands, the Cayman Islands, Mexico, and Indonesia. While not currently operating in California, Consolidated Water clearly has the technical know-how, and is another logical choice for investment should California move ahead with plans to build more desalination plants.
Bring in the big guns
Two companies with even more financial heft could also come to California's aid -- France's Veolia Environnement (NASDAQOTH: VEOEY) and America's own General Electric Company (NYSE: GE). The self-proclaimed "global leader in desalination," Veolia boasts "more than 100 years of experience ... implement[ing] desalination strategies" and says it's helping 51 countries around the globe get the salt out of their water. These projects include the huge desalination plant in Sydney, Australia, that currently supplies 15% of that city's water, and Iraq's largest desalination plant, located in Basrah.
GE is nearly as puissant. The world's second-biggest equipment supplier in the field of water treatment, GE helped set up Africa's largest desalination plant, in Algiers, Algeria, in 2008. It took GE only two years to get the plant up and running "on time and on budget," and it's now supplying Algiers with 53 million gallons of drinking water per day. GE is currently exploring options to sell its water business, but for the time being, it remains a big player -- and whomever it ends up selling to could be come an even bigger player.
Meanwhile, defense industry giant Lockheed Martin (NYSE: LMT) says it has developed an entirely new technology for desalination that's capable of filtering water "at a fraction of the cost of industry-standard reverse osmosis systems."
Which is the best investment?
Everything depends on whether California decides to act to solve its drought problem by leveraging its position by the Pacific into an inexhaustible supply of clean water through desalination. For now, Israel Chemicals is the clearest winner from this crisis, and positioned to parlay its success in Carlsbad into additional projects elsewhere in the state.
Further out though, GE (or its successor) and Veolia could certainly play a role in building California's desalination infrastructure. The biggest opportunity of all would be if a smallish company like Consolidated Water decided to get in the game. At Carlsbad, project managers aim to produce about 50 million gallons of water a day -- which equates to 153 acre-feet of water for irrigation. San Diego has contracted to pay $2,000 per acre-foot for water from the Carlsbad plant, and that should work out to about $307,000 per day in revenues for a Carlsbad-size facility -- or $112 million annually.
By way of comparison, according to S&P Global Matket Intelligence, all of the revenues Consolidated Water generated over the past 12 months, from all of its water plants combined, was barely half that amount-- just $57.2 million. One single contract from California would triple the size of its business.
That is, it could, if California gets serious about fixing its drought problem permanently. For now, that's the biggest "if" of all.
Remember Scrooge McDuck, smiling and taking a dive into a big pile of money? That's approximately how much Rich Smith likes clean water. He does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 335 out of more than 75,000 rated members.
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