Looks like a great spot to hike to whatever the pack!
As far as the water bottle...most ultralight hikers I know have abandoned nalgenes in favor of lightweight disposable water bottles - looks like the Durston web site shows a pair of 750ml Smartwater bottles in that pocket. Might be worth a try, and cheap to find out if you prefer that to a nalgene.
I usually figure if it's raining hard enough for seams to leak stuff is going to get wet when I pack/unpack at camp anyhow, so I just go for keeping clothes & sleep gear in a plastic bag and don't worry about the rest. But if I were to seam seal a pack, I'd definitely go for the outside - trying to do the inside would have problems with the seam binding being in the way of the actual seam I think. Probably stuff the pack with something first too, though not something I cared too much about in case some of the sealant gets through. Old blankets maybe.