Photo credit: LINN Energy 

LINN Energy (LINEQ) basically started the income-focused oil and gas MLP sector as we know it. The company was the first publicly traded oil and gas master limited partnership to hit the market in years, and its plan to fully hedge production and grow by acquiring mature assets provided a new spin on an old idea. This wildly successful concept has enabled LINN to grow from a $700 million company to an $18.5 billion behemoth in less than 10 years. 

Imitation is the sincerest form of flattery
LINN's latest surge in growth came from creating LinnCo (NASDAQ: LNCO) to be used as an acquisition currency. The company used LinnCo's IPO to raise cash for an acquisition, but its big splash came last year when LinnCo was used to buy a large, oil-rich C-Corp. The company has proven that LinnCo works as an acquisition currency and is likely to use it again to acquire additional C-Corps. Innovations such as this are what grew LINN Energy into a top 15 MLP, as well as a top 15 independent exploration and production company.

That being said, LINN Energy has been known to steal an idea or two from its competitors. For a while Vanguard Natural Resources (NASDAQ: VNR) prided itself as being the "monthly distribution MLP." That changed when LINN Energy instituted its own monthly payout. It won't be the last time an idea within this sector is borrowed. 

In fact, around this time last year, Vanguard noted in its quarterly conference call that it was considering returning the favor by creating its own LinnCo-like vehicle, which is dubbed VanCo. Vanguard Natural Resources hasn't yet followed up on this idea. Instead, it issued preferred units to help fund its last few acquisitions. It was a quicker fix that didn't involve a dramatic change in the company's operational plans.

To date, LINN Energy hasn't seen the need to copy that particular idea. But here's a really smart idea that LINN Energy might want to steal instead.

Starting a new Legacy
Last week, Legacy Reserves (LGCY) announced a new strategic alliance with a growth-focused oil and gas driller. The alliance saw Legacy Reserves swap $355 million in cash, along with newly created incentive distribution units, or IDRs, for low decline natural-gas assets in the Piceance Basin. Legacy Reserves issued 10% of the 1 million newly created IDRs to fund the initial phase of the deal. Legacy Reserves also handed over an additional 20% of its IDRs that vest as future drop-down transactions are completed.

Going forward, Legacy Reserves' new alliance partner can vest at a rate of 10,000 IDRs for every $35.5 million in future drop-down transactions it completes, as the following slide notes.

Source: Legacy Reserves Investor Presentation (Link opens a PDF) .

Legacy Reserves can acquire just over $700 million in future assets without issuing any new units or taking on any additional debt. That's a lot of capital for a company with a $1.5 billion market cap. Furthermore, the company is holding on to 700,000 IDRs worth up to $2.5 billion at that vesting rate, which could be used to make third-party acquisitions. Needless to say, Legacy Reserves has created a lot of dry powder to fuel future acquisitions.

LINN Energy could use this unique strategy in the future. While the company plans to use its land bank in the Midland Basin, and possibly the Anadarko Basin, to acquire low-decline assets, at some point LINN Energy will run out of assets to trade. Furthermore, LinnCo is somewhat limited in the types of C-Corps that it can acquire without creating a whole lot of dilution. 

LINN Energy has more options to fund its growth than continually issuing units and debt. The company could one day follow Vanguard Natural Resources' example and issue preferred units, or better yet, steal Legacy Reserves' idea and create IDRs. LINN Energy has more ways to grow than some give it credit for.