LINN Energy Needs to Steal This Idea

LINN Energy is one of the most innovative MLPs when it comes to raising capital for acquisitions. However, some of its competitors have come up with some smart ideas worth stealing.

May 15, 2014 at 1:10PM
 Linn Energy Worker

Photo credit: LINN Energy 

LINN Energy (NASDAQ:LINE) 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 (NASDAQ: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.

Legacy Idrs

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. 

LINN Energy's little secret
LINN Energy is among a handful of energy companies using a small IRS "loophole" to help line it's investor pockets. It's a strategy you need to learn as it can really pad your portfolio with cash. To learn more about the "loophole, and the energy companies taking advantage, you need to check out our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Matt DiLallo owns shares of Linn Co, LLC and Linn Energy, LLC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers