Far be it from us to offer tips to Warren Buffett, the most celebrated stock picker of his age, but here goes:
The Oracle of Omaha has suggested he will hunt for his next "elephant" - his favourite word for big acquisitions - among energy companies. That could dovetail with the bet he made in 2009 when he bought Burlington Northern Santa Fe railroad, which has turned into an indirect play on the US oil production renaissance: BNSF moves about a third of oil-by-rail, a surging segment of freight rail.
So, we have some ideas. Reuters screened for US and Canadian companies with relatively low debt and market capitalizations above $5 billion, among other criteria.
First, because Buffett's Berkshire Hathaway has about $49 billion to spend, he's said he's looking at capital intensive companies, which offer plenty of chances to put that money to work.
He might like a hot niche like oilfield services or pipelines: good candidates could be Baker Hughes in drilling services or Williams Partners in oil and gas distribution, which would also expand the scope of his recently rebranded Berkshire Hathaway Energy unit.
Alternatively, he could opt for a safer play by scooping up another regulated utility to add to previous purchases such as NV Energy in Nevada and MidAmerican Energy, which serves customers in eleven states and added about $1.47 billion to Berkshire's profits in 2013. While not spectacular earners, regulated utilities tend to be steady, reliable cash generators, a feature Buffett likes. One candidate could be Pinnacle West Capital, though it may be a little smaller than what he's looking for.
None of Baker Hughes, Williams Partners and Pinnacle West responded to requests for comment.
"Electric generation, electric transmission and long-haul pipelines - they're being about as blunt as they can be that they're going to grow" in that area, said Kevin Birzer, a senior managing director at Tortoise Capital Advisors, which specialises in energy investments.
Check out Pinnacle West, owner of the Arizona Public Service Company, which provides electricity to about 1.1 million customers and trades at a discount to peers by several measures, including price-to-cash flow and price-to-earnings. Between the company's $6.1 billion market cap and its $3.6 billion in net debt, for an enterprise value of $9.7 billion, the company may be smaller than Buffett wants.
Still, analysts from TheStreet Ratings noted Pinnacle West's reasonable debt and good cash flow from operations in calling the company a buy earlier this month. "We feel these strengths outweigh the fact that the company has had sub-par growth in net income," they wrote in a report dated May 18. If Buffett wants a company more closely tied to oil production, he could opt for Baker Hughes.
With a market cap of about $30 billion and net debt of about $3.9 billion, Baker Hughes' enterprise value of $33.9 billion comes in at the high end of what Buffett could spend while leaving himself the $20 billion cash cushion he's said he wants.
Even so, that large a deal might require him to team up with an outside partner as when he bought H.J. Heinz, an option Buffett has said he may pursue again.
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