Billionaire Warren Buffett’s Next Elephant: Chesapeake Energy Corporation (CHK), Anadarko Petroleum Corporation (APC), Devon Energy Corp (DVN)

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Some interesting news caught my interest on what could indeed be Buffett’s next elephant. Berkshire Hathaway Inc. (NYSE:BRK.B)‘s Burlington Northern Santa Fe is pursing the use of natural gas as its primary fuel for powering its railcars. This brings to light thoughts as to whether Buffett could, or should, be considering his next buyout target as a natural gas company. So which natural gas companies could Buffett snatch up?

Chesapeake Energy (CHK)

Behind only Exxon Mobil Corporation (NYSE:XOM), Chesapeake Energy Corporation (NYSE:CHK) is the second largest natural gas producer in the U.S. Anadarko Petroleum Corporation (NYSE:APC) is the country’s third largest natural gas producer and Devon Energy Corp (NYSE:DVN the fourth.

Buffett openly noted he is looking for his next “elephant” and invited companies to apply for consideration. By elephant, Buffett means his next big purchase. Buffett had this to say in his latest letter to shareholders: “But we still have plenty of cash and are generating more at a good clip. So it’s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.”

Why the move to natural gas makes sense

The Energy Information Administration expects the future consumption of natural gas to be a steady up-and-to-the-right trend. As an engine fuel, natural gas only accounts for 0.2% of the market, meaning there is plenty of room for this fuel to grow. Other publicly traded rail companies — Union Pacific Corporation (NYSE:UNP). and Norfolk Southern Corp. (NYSE:NSC). — have also been working with engine manufacturers to explore the move to natural gas. Meanwhile, another major rail company, CSX Corporation (NYSE:CSX), is studying the technology.

Fuel is second to only labor as the rail companies’ top expense. For 2012, diesel fuel costs stacked up as follows (as a percent of revenue):

Union Pacific: 17.2%
CSX: 14.2%
Norfolk Southern: 14.3%

Union Pacific burned 1.09 billion gallons of fuel last year at an average price of $3.22 a gallon. A 30% reduction in fuel costs for Union Pacific would lead to a 27% increase in earnings. However, the move to natural gas would be even more monumental for BNSF, as it is the second largest user of diesel in the U.S., behind only the U.S. Navy.

The synergies for BNSF and a natural gas company would be quite impressive, but what’s the likelihood of such a deal? Here is how the enterprise values stack up for the top three natural gas prices:

Chesapeake Energy Corporation (NYSE:CHK): $27 billion
Anadarko Petroleum Corporation (NYSE:APC): $53 billion
Devon Energy Corp (NYSE:DVN): $27.5 billion

Putting the above numbers in perspective, Buffett’s cash outlay for H.J. Heinz Company (NYSE:HNZ) was $23 billion, and his Berkshire company still has some $47 billion of cash on hand.

So which company is the best option? Chesapeake is the cheapest of the major gas producers…

Price to Sales Ratio

Chesapeake: 1.2
Anadarko: 3.1
Devon: 2.4

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