Water stocks have been in a drought for 20 years. I have been hearing about the great potential for water stocks for at least that long. ‘Water will be worth a lot some day—maybe one day soon’ is the line I hear every few years. But investors have not made much if any money on this most basic commodity.
So when a 103 page research report on Vidler Water (VWTR – NASDAQ) arrived in my inbox, I was skeptical—as I will explain.
But with freshwater reservoir levels in the US Southwest now very low, and high-profile investors like SPAC guru Chamath Palihapitiya looking seriously at this sector—maybe the drought in water stock performance is over.
I was skeptical of Vidler at first as the story came with two quick strikes against it.
Strike one came when I realized that Vidler was the old Pico Holdings. I am familiar with Pico. Pico is a water story that has been around for years and, to be honest, it has never made anyone much money (except maybe management).
Then strike 2 came when I realized it is pretty much the same story it was with Pico. When Pico was making the rounds, it was all about water rights and home building. The home building angle seems to have gone by the wayside and investors are left with a water rights play.
My problem with water rights is that it’s a bit of all or nothing. Either you sell them or you don’t. In Pico’s case (now Vidler) they could not seem to sell the water rights for what they believed they were worth.
Behind in the Count but not done yet
After the first two strikes I was not holding out much hope for Vidler. But I kept on digging and I am glad I did.
My big issue when I started looking at Vidler was – what is a catalyst? A reason that those water rights might get sold some time soon.
As I dug into the story, I found there was just such a catalyst – and a big one at that.
The story the Hoover Dam and Lake Mead.
Water levels at Lake Mead are dropping like a rock right now.
There is a big drought throughout the west. That drought is having an impact on Lake Mead. There are a pile of articles you can find that describe just how bad it has gotten for Lake Mead, but a picture says 1,000 words.
Source: Bloomberg.com
That white bathtub ring is telling you where Lake Mead was versus where it is now.
This website tracks where Lake Mead is today versus its level over the past 5 years.
Source: Lakelevels.info
Lake Mead is lower today than it has ever been in the past.
It came close to this level in 2016 but it quickly recovered. The drought ended – or at least went on sabbatical.
But today is different. It is not expected to recover. Water levels have definitively dropped to a Tier 1 level.
What is Tier 1?
Source: Bloomberg.com
The tiers of Lake Mead are like lines in the sand. Beginning at Tier 1, when the water breaches this level water cutbacks ensue.
The Drought is Widespread
It is not just Lake Mead. The reservoirs upstream of Lake Mead, also along the Colorado River, are also very low. Lake Powell, which serves Colorado, New Mexico, Utah and Wyoming, has seen inflows this year that are just 33.62% of average. The water level at Lake Powell is at least a 10-year low (as far back as the data I saw went).
There are 7 states that depend on Lake Mead, Lake Powell and the rest of the Colorado River Basin: California, Colorado, Nevada, Arizona, Utah, Wyoming, New Mexico.
As these states realized that water levels from the Colorado River Basin were unlikely to bounce back, they began to negotiate how the water would be divvied up.
In 2019 the Colorado River Basin Drought Contingency Plan was signed.
You have to go way back to 1968, but because of a political agreement Arizona signed with California at the time, they will take the lion’s share of the Tier 1 cuts (this blog post describes the details).
In 2016 Lake Mead dropped below Tier 1. But because it was brief no Tier 1 water shortage was declared.
This time around everyone expects a Tier 1 shortage will be declared. I have not been able to find a single article arguing that it won’t be declared.
The Tier 1 shortage declaration is going to happen August 1st. It could be followed by a Tier 2 shortage declared next year, but that is going to depend on water levels.
Why this Matters to Vidler
As I said the first cut falls disproportionately on Arizona.
Vidler has two big assets. One of them just happens to be a lot of water… in Arizona.
Vidler owns what are called Long-Term Storage Credits (LTSCs) in Arizona. LTSCs are essentially stored water that is recognized as such by the state of Arizona. Because it is recognized by the state, it can be sold.
Vidler has LTSCs in Phoenix and in the Harquahala Valley – about 90 miles west of Phoenix. It is all essentially water that can be used by Phoenix – for a new subdivision, a new semiconductor plant, whatever.
Vidler has been sitting on this water for some time. With the Tier 1 water shortage about to be declared, that is going to change.
That isn’t me talking. It is management. From the annual meeting (Vidler does not do quarterly calls because, quite honestly, nothing really happens that fast with this company):
We would expect once a shortage is declared in August that we would see the Phoenix AMA credits disappear, go to other users. We believe that we would start seeing a takedown… on the Harquahala… We have gotten more calls over the last year on Harquahala, and we have actually handed out contracts, draft contracts for review.
What are those water rights going to go for? Again, management was quite upfront about this at the AGM:
As of July 1, 2021, Phoenix AMA pricing will be set at $400 per credit.
Harquahala credit pricing is close to the same.
Vidler owns 28,147 acre-feet of LTSCs in Phoenix and another 250,683 acre-feet at Harquahala. At $400 per acre-foot (AF), a sale of all their rights would gross them $110 million.
I’d look at that $400 per AF as a minimum. Likely, as those credits begin to be bought, Vidler will raise prices. They would be crazy not to.
Nevada Assets
The Arizona assets are clearly the near-term catalyst. But Vidler owns other assets as well.
These assets are in Nevada. Vidler owns underground water sources outside of Las Vegas and Reno and a pipeline that takes water from their wells to Reno.
The Nevada assets are actually worth more than what they have in Arizona.
Near Reno Vidler has a 7,310 acre property called Fish Springs Ranch. Fish Springs holds 12,696 AF of water rights, including 7,696 AF that are already designated as water credits available for developers.
There is also a 35-mile pipeline that can deliver 22,000 AF of water, a pump station, electric sub-station, and six wells that together cost the company $95 million to build.
A point of clarification: the water rights at Fish Springs, and throughout Nevada, are not quite the same as Arizona. In Arizona Vidler owns a volume of water – when I am quoting numbers, I’m telling you the volume of water they can sell.
In Nevada, what they are selling is a sustainable water rate – how much water (in AF) that they can extract per year.
That makes the water rights in Nevada worth a lot more on a per acre-foot basis than Arizona.
Again, going back to the AGM, management was kind enough to tell us what they are willing to part with the Fish Springs water for:
We are increasing our pricing by 5% as of July 1, 2021, to $43,575 per acre foot for residential development and $37,800 per acre foot for commercial/industrial development.
The math on this is somewhere between $291 million and $355 million for the 7,696 that is already permitted. Add on another $200 million once they successfully permit the other 5,000 acre-feet.
The Fish Springs assets are a 51/49 partnership. But there is a catch. Vidler has been putting up all the capital for the partnership and that capital receives a preferred return on sales – including accrued interest at 4.74%.
What that means is that before their partner sees a penny, Vidler gets the first $195 million from sales. After that, it is split 51%/49%.
In addition to the Reno asset Vidler has assets in Southern Nevada. They have 1,171 acre-feet of water rights in Lyon County Nevada, which would serve Carson City and another 3,288 AF of agricultural rights in that area.
At the AGM Vidler said that the sales price in Lyon County was “26,000 per acre foot, which will increase to July 1 — which will increase on July 1 to $27,000 per acre foot”. They also own a pipeline in Lyon County with 5,000 AF capacity.
Also in southern Nevada, they own rights for water that could be utilized by Las Vegas. Here Vidler owns 4,400 AF of water rights, of which 1,000 AF is for agricultural use.
There are other assets too. There are multiple parcels of land around Las Vegas where Vidler has water permit applications in process. There is the land itself, some of which Vidler has leased out to solar companies for single-digit millions in lease revenue.
AS THE WATER GOES LOWER,
THE STOCK COULD GO HIGHER
The bull case for Vidler has always been dead simple.
At $13 Vidler has a market cap of $232 million. There is no debt and a little cash. When you add up all their assets, they are worth a lot more than that.
Consider only the Arizona LTSCs and the permitted water at Fish Springs Ranch alone and you are already over $21 per share.
Getting to $30+, especially considering this water crisis is more likely to get worse than better, is not a hard task.
The problem with Vidler has always been when, when, when.
The Nevada assets are progressing – there are Reno developments, Las Vegas developments that will need Vidlers water – but nothing major is imminent (read: in the next 6 months).
So what this story is really about right now is Arizona.
And Arizona could quite possibly be at an inflection point.
If the Tier 1 shortage is indeed declared, then we should expect a speedy sale of the Phoenix LTSCs and at least some of the Harquahala LTSCs. Both Intel and Taiwan Semiconductor have plans to build plants around Phoenix. Those developments will need water.
If Vidler can sell all their LTSCs, they bring in $100 million+. Sell half and they bring in $50 million.
This becomes a catalyst because the current management is focused on return of capital. Again, from the AGM:
Our focus is to maximize our return on our invested capital. And that is evident by our Board and management’s equity ownership, which is over 11%, and the structure of our management compensation.
Vidler management did a $5 special dividend in 2017 and have repurchased 4.9 million shares through May 2021 (there are about 18.5 million shares right now).
The Chamath Connection
There is one other potential angle for Vidler. Another excellent blog post summarized a recent discussion between the well-known SPAC and VC investor Chamath Palihapitiya and other VC investors on their “All-in” podcast.
On the podcast Chamath talked about the opportunity in water and how the best way to own it is by “owning water rights”.
The blog post also provides some evidence that Chamath and his team may already have created a fund (most likely a charitable one) to own water rights.
Will any of this amount to anything? Hard to say. If Chamath and the VC cohort did decide that Vidler was worth owning, it would certainly be helpful for realizing the share price.
It’s the Weather Stupid
VC’s talking water smack is an interesting angle but the story is going to live or die on the Tier 1 water shortage.
I’ll be honest – I considered making Vidler a subscriber pick. The sum-of-the-parts is there. The chart is consolidating its new range and setting up well.
My hesitation is that the whole story turns on the weather.
Las Vegas and the south had torrential rains over the weekend. They are set up to continue through the southwest for the next week.
The longer-term forecast looks more constructive. The precipitation forecast for the southwest looks to be below seasonal until at least the new year.
Source: NOAA
But these rains do illustrate a point. It is tough to pitch a subscriber pick that turns on the weather. I guess I have had too many years of natural gas investing for that.
That said, there is clearly a catalyst here and the case can certainly be made that the stock is worth a punt. It is clear that Vidler is a better story than it has been in the past. The assets have always been there. We are now about to see what happens if catalysts materialize.
