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Four Deals Primed for Warren Buffett's $40 Billion War Chest

Berkshire rails into coal players Peabody Energy (BTU - Get Report) and Cloud Peak Resources(CLD)

For investors in the coal sector, even a focus on best of breed industry players like Peabody Energy (BTU - Get Report) and Cloud Peak Resources ( CLD) has been a big money loser in 2012, amid concerns on the economics of thermal coal and a demand slowdown for metallurgical coal from Chinese buyers. Quietly, Berkshire Hathaway has been on the losing side of coal's 2012 slump, which culminated with the bankruptcy of Patriot Coal in July.

In buying railroad giant Burlington Northern Santa Fe, Buffett became highly exposed to the U.S. coal industry, which uses railroads like BNSF, Union Pacific (UNP), CSX (CSX) and Norfolk Southern (NSC) to transport the energy source. In fact, in the second quarter, the coal sector weighed heavily on Burlington Northern's earnings, which grew nearly 7% to 5.1 billion for the quarter. While shipment of consumer and industrial products was higher, the weakness in the coal market as natural gas continues to replace coal as a source for power generation offset gains made by Burlington in more cyclical industries. At the time Buffett struck the Burlington deal, and contrary to analysis that it was a transportation play or" bet on America," as Buffett likes to say, coal analysts viewed the deal as a bet on decades of future coal shipments from the West coast to Asian markets.

Companies like Peabody and Cloud Peak with heavy exposure to profitable coal mines in regions like the Powder River Basin of Wyoming may be poised for a pick-up in shipments that would supplement BNSF's and Berkshire's earnings. If Buffett were to be convinced either of the economics of thermal coal or the continued Chinese demand for met coal, which needs to be transported to the West Coast for export, a coal based acquisition might be well-timed vertical integration for Berkshire.

Still, a coal investment would carry significant risk for Buffett, who normally is a conservative investor even when targeting value stocks. Some analysts say that in spite of share losses that shaved between 30% and 50% off of most coal sector stocks, the sector may yet face headwinds and Buffett isn't in the business of catching falling knives.

For more on coal investments, see why China risk is bigger than bankruptcy fears and why old king coal is headed to the retirement home.

See why Warren Buffet shuns investment banks for more on other Berkshire investments.

-- Written by Antoine Gara in New York
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