Translation:You drink milk and I drink water.
Du = de le = of the/ some (masculine) - which agrees with lait (masculine.)
L'eau = la (feminine) eau (feminine) = the water.
De l'eau = de la eau = of the water. (some water)
Du l'eau would equal de le/ of the (masculine) la eau/ the water (feminine) which is incorrect. It crosses gender and has the twice.
De = of. (in this context). - De lait = of milk - glass of milk.