By Luciana Lopez
NEW YORK (Reuters) - 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 U.S. 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 U.S. 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 specializes in energy investments.
PINNACLE
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 (3.6 billion pounds) 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.
BAKER HUGHES
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.
Baker Hughes, which supplies oilfield services such as drill bits and fuel additives and has annual revenue above $22 billion, is trading at a discount to peers on several key metrics, including ratios measuring its enterprise value against both sales and earnings before interest, taxes, depreciation and amortisation, or EBITDA, according to Reuters data.
Its first-quarter earnings beat expectations on a 7 percent increase in North American revenue, with better North American margins even as well count dropped.
The company also has significant presence overseas, including the Middle East, Latin America and Asia, offering a chance to broaden Berkshire's geographic reach.
One risk may be that Baker Hughes will be too closely tied to oil prices and the capital expenditure cycle for major petroleum producers for Buffett's taste.
WILLIAMS
In that case, Williams Partners could appeal.
Williams, which focuses in part on natural gas and oil transportation, has a market cap of about $22.8 billion, but with $8.3 billion of debt, its enterprise value is not all that much lower than Baker Hughes, about $31.1 billion.
Also like Baker Hughes, Williams, with total revenue of about $6.7 billion last year, scores well on a number of relative valuation markers, trading at discounts to peers on price-to-earnings and price-to-cash flow.
The company keeps generating cash thanks to "the combination of a core interstate gas transmission system and a liquids-leveraged midstream business," according to Morningstar.
That's an important attribute given its debt-to-equity ratio of 0.8, which is a bit above the industry norm.
Negotiating a deal with Williams could be complicated, given its status as a limited partnership 70 percent owned by Williams Cos.
But the company has another advantage Buffett likes - a wide moat, or competitive advantage, thanks to its ownership of the Transco gas mainline, which runs from Texas to New York.
"We think of the Transco pipeline system as a classic wide-moat asset, one that presents a highly attractive set of organic growth opportunities," the Morningstar analysts wrote.
So, Warren, what do you think? If you wind up picking these companies and they work out for you, let me know! I'm at Luciana.Lopez@ThomsonReuters.com.
(Reporting by Luciana Lopez; Editing by Dan Burns and John Pickering)