Flowing Profits in Water

11/10/2014 10:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Utility sector expert Roger Conrad—editor of Conrad's Utility Investor—sees long-term opportunity in the water sector. Here, he discusses his favorite plays involved in water infrastructure, spending, and the water utility space.

Steven Halpern: Our special guest today is Roger Conrad, a leading utility sector expert and the editor of Conrad’s Utility Investor.  How are you doing today, Roger?

Roger Conrad:  I’m great, how are you, Steve?

Steven Halpern:  Very good.  Thanks so much for joining us.  Today, we’re going to talk about the water sector and, in your latest research, you note that it is estimated that billions of dollars are going to need to be spent on infrastructure in the water arena.  Could you expand on that and let our listeners know what you’re looking at.  

Roger Conrad:  Well, you know, there are a lot of different needs here.  On the one hand, we’re talking about systems that are wearing out, particularly in larger cities, but also in smaller areas where people have traditionally been able to just sink a well into the ground and rely on their water supply in that way.  

As we’ve seen more degradation of watersheds, and so forth, there is more of a need to process and treat water and also to harvest it in various ways.  So, that takes a tremendous amount of spending, so that’s one area.  

Also, the US energy boom is seeing a lot of new wells drilled, particularly in areas where we haven't had a lot of energy production traditionally, such as the Bakken in the upper Midwest and all of these.

In energy drilling, one thing a lot of people aren't aware of is that it requires a lot of water, and particularly, when you’re talking about drilling in areas that don't have a lot of water, you’ve got to manage it well.  

Again, these are all major projects that water companies can fill the gap in, whether they’re regulated water utilities or they’re companies that provide some sort of service, or equipment, or operate under contracts.  

However you slice it, there is a tremendous opportunity, not only in this country, but also around the world.  This is a really nice, long-term opportunity that many different investors can take advantage of, from conservative to more aggressive.

Steven Halpern:  For those looking for exposure to this infrastructure story within the water sector, you point to one company called Aegion Corp. with the symbol (AEGN).  What’s the story, there?

Roger Conrad:  Well, this is a company that is moving in several different directions in terms of water.  Their signature product was actually the trenchless pipe repair that they kind of launched the company around several years ago as known as Insituform, but they’ve diversified.  


They’ve built a pretty large business in energy, so again, that’s recycling water and managing water flows to hydraulic fracturing, and also, traditional wells, and what you have is a company that’s got a global reach and a nice plan and is growing backlog in several different areas.  The third quarter came out a little weaker than some people expected, primarily on the energy side.  

A lot of people are very worried about new projects going forward with oil prices coming down and so, therefore, you’ve seen a little bit of weakness in the stock, but the wastewater and the water side of the business—with the municipalities, and so forth—is very strong.  This is a company that has it all.  It is moving in a lot of different areas and it is also, I think, fairly cheap.

Steven Halpern:  You also follow the water utility sector very closely and, in your latest research, you highlight Aqua America with the symbol (WTR).  Can you tell us about this company?

Roger Conrad:  Well, this is a great company that, basically, has a formula of growing earnings and dividends by simply acquiring smaller and weaker players in the water space.  

You know, there are almost 50,000 small water systems that serve less than 3,000 people, and, as I mentioned at the outset, there is probably a progressive problem with degradation of systems, and watersheds, and so forth.

So, you have these small entities that really just can't afford to make the investment needed to comply with new regulations to insure safe drinking water, and so, the easiest thing they can do is to combine with a company like Aqua.  

Aqua has been able to go out there—by virtue of its size and scale—access the capital and make acquisitions at very low prices, and add them into their systems and really realize some very, very steady growth.  

They just increased their dividend pretty close to 9% and they had earnings growth matching that and it is a formula that has been in place for, I guess, 20+ years, and I should mention that I have owned that stock over that time and it has been just a real nice one, just a very simple story, but very much locked into a long-term growth trend.

Steven Halpern:  Now, another idea in the water utility sector is Algonquin Power and Utilities, which happens to trade over the counter under the symbol (AQUNF), as well as on the Toronto exchange under the symbol (AQN).  Can you tell us a little bit about this company and which exchange you would recommend somebody should consider for purchase?  

Roger Conrad:  Well, I think, just generally, when you have Canadian companies like this, or any company, trading over the counter you, really want to check with your broker to see which is the cheaper option.  In some cases, it is going to much cheaper to trade in Toronto, and in some cases, it is going to be cheaper to trade it over the counter.  


However you do it, it is the same ownership and this is a former income trust that has really transformed itself.  It has purchased a number of water, and actually, also gas utilities in the United States, so that is a regulated fee business.

But they’re also a power producer, so they’ve got a great deal of hydro and wind and so forth, and so, it’s taking advantage of a lot of different opportunities in a lot of different areas, but building a very secure and steady revenue base.  

They’re about 25% owned by a giant utility in Canada known as Emera. It is the parent company of Nova Scotia Power, so they’ve got a lot of financial backing for them.  

They pay around 4% and they’ve been growing that dividend—between 8% and 9% a year—so that’s a nice formula for growth, particularly in a steady business like this and because of the fact that the Canadian dollar has dropped against the US dollar over the past couple of years, US investors can buy it at a nice discount.  

This is one that is a little below the radar of a lot of people, but certainly has a very nice formula and it is not a tiny company either.  It has about $2 billion in market capitalization, so a really nice way to play a couple of areas in water that produce very, very steady growth and are very conducive to paying growing dividends.

Steven Halpern: Now, finally, you suggest that more aggressive investors could consider a company called Consolidated Water with the symbol (CWCO).  What’s the attraction there and why are you recommending this more for the aggressive investor out there?

Roger Conrad:  Well, this is a company that specializes in reverse osmosis water systems.  Their primary customers are in island countries, the Cayman Islands is their largest area; Bermuda, also the Bahamas, British Virgin Islands.

And this has been a business that, in the early years, they were really just able to throw up any kind of a facility they wanted and realize more growth.  They’re trying to get back to that.  

They ran into some difficulty a couple of years ago with the British Virgin Islands over rates and they’ve reached a settlement on that, but that really, kind of, held back their growth for a while.  I think it’s an interesting play from the point of view that it doesn't take a lot to really move the meter for this company to grow.

They have a fairly large project they’re trying to build on the US/Mexico border on the west coast of North America, and if they’re able to get this thing built, then it’s going to require a fairly large number of regulatory approvals and financial backing and some execution on the actual building of the project.

But if they’re able to get that done, this is going to be a far more valuable company going forward and I could see an easy double in the stock, along with rising dividends.

Steven Halpern:  We really appreciate you taking the time, today.  Thanks so much for joining us.

Roger Conrad:  Thanks, Steve.  

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