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

While fund managers Mason Hawkins of Southeastern Asset Management and Carl Icahn are big fans of the turnaround story at Chesapeake (check out all of Icahn’s picks), fellow billionaire T. Boone Pickens has been a long-time advocate of natural gas and has Anadarko as his fourth largest holding (6.7% of his portfolio), and Devon Energy Corp (NYSE:DVN) as his seventh largest (6.3% of his portfolio).

Part of the draw for Buffett to Chesapeake Energy Corporation (NYSE:CHK) is its leading natural gas production position, behind only Exxon. What’s more is that Chesapeake’s assets are located in the U.S., unlike Anadarko. The company has also been aggressively reducing debt by selling off and monetizing previously unused assets. Part of what I think rules Anadarko out as a Buffett elephant is its international exposure and high price tag to purchase the company. Anadarko Petroleum Corporation (NYSE:APC) has the majority of its international exposure based in Africa, where the political instability and geographical distance will likely make the stock unappealing to Buffett.

Devon Energy Corp (NYSE:DVN)’s current production portfolio is around 50% natural gas, 20% NGL and 30% oil. However, it may have more exposure to the oil markets than expected, making it a poor purchase for Buffett. Devon’s acreage in the popular Permian Basin is also heavily oil-rich, while the company has a recent joint venture to boost its exposure to oil sands, which is a negative for attracting Buffett as a buyer.

It appears that Chesapeake might be the better buy, with a reasonable sub $30 billion price tag, a leader in natural gas reserves and one of the top producers of the commodity. Chesapeake also has the better expected growth, with Wall Street expecting the company to grow EPS at 47% annually, compared to Devon Energy Corp (NYSE:DVN)’s 7% and Anadarko Petroleum Corporation (NYSE:APC)’s 21%.

The bottom line

BNSF hopes to start testing during the third quarter, which includes using engines from both Caterpillar Inc. (NYSE:CAT) and General Electric Company (NYSE:GE), and making a final decision in 2014 on whether to move forward with the conversion. Although this would be a long-term investment decision for BNSF, moving forward with such a deal would be a step in the right direction. New Environmental Protection Agency air-pollution standards for railroads will soon require railroads to add expensive emissions-control equipment to new diesel locomotives in 2015.

As far as the best potential acquisition for Buffett, it appears that Chesapeake Energy Corporation (NYSE:CHK) is the cheapest and has one of the best asset portfolios, so keep an eye on this space.

The article Billionaire Warren Buffett’s Next Elephant originally appeared on Fool.com and is written by  Marshall Hargrave.

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