Vanguard Natural Resources (NASDAQ: VNR) believes there's over $2 trillion worth of expenses ahead for U.S. shale drillers over the next 30 years. That's a lot of money! According to LINN Energy (NASDAQ: LINE) one of the ways that larger drillers will fund this cash is by selling properties that are reliable, but where production is slowly declining. Managing such fields, however, is this pair's focus.

Old is good
LINN Energy and Vanguard Natural Resources specialize in keeping old oil and natural gas fields running. These types of properties typically have well-defined reserve lives and well-defined decline rates. Thus, both LINN Energy and Vanguard Natural Resources know with a fair amount of certainty what they own and what it will produce over time.

That's why LINN Energy and Vanguard Natural Resources are both structured to pass cash to unit holders. LINN Energy, for example, is a limited liability company that sports a yield of roughly 9.3% and Vanguard Natural Resources is a limited partnership that carries a yield of 8%. Those yields are protected from commodity volatility by significant hedging portfolios that lock in prices.

(Source: Chappell, via Wikimedia Commons)

LINN Energy currently has hedging contracts out all the way to 2018 (12% of production). That may seem like a small amount, but it's roughly twice the amount of the company's limited liability and limited partner peers. In fact, all of LINN Energy's 2014 production is locked in, with the next three years hedged at 89%, 85%, and 67%, respectively. Again, all of those levels are higher than LINN Energy's direct competitors.

Vanguard Natural Resources, meanwhile, has hedged roughly 75% of its natural gas production through 2017 and 90% of its oil production through 2015. To give a comparison point, LINN Energy reports that peers structured as corporations have less than 50% of 2014 production hedged, with lower amounts covered thereafter. (This group has only 1% of 2018 production is hedged.)

The opportunity
And this highlights part of the opportunity for LINN Energy and Vanguard Natural Resources. They are less concerned with growth than they are with being able to support their dividends. Larger drillers, however, are shifting out of mature assets (long reserve lives with low decline rates) so they can boost production numbers.

That should provide this pair with a constant flow of growth opportunities. For example, LINN Energy has acquired over $10 billion in oil and gas properties since 2008. Over that same span, Vanguard Natural Resources' production has grown from 2,700 barrels of oil a day to over 53,500. Its reserves, meanwhile, have increased over 2,500%.

Case in point
LINN Energy's recent land swap with the oil industry's largest player is a prime example. LINN Energy gave up property in the Permian Basin and got land in the Hugoton Basin. According to the U.S. Energy Information Administration, "crude oil production in the Permian Basin has increased from a low point of 850,000 barrels per day (bbl/d) in 2007 to 1,350,000 bbl/d in 2013." It now accounts for 18% of U.S. crude production and "has exceeded production from the federal offshore Gulf of Mexico region since March 2013."

(Source: US Department of Energy, via Wikimedia Commons)

Why give up property in this obviously desirable region? Well, LINN Energy was able to acquire assets with a reserve life of roughly 22 years and a low decline rate of around 6%. And the acquisition doubled its drilling inventory in the region to 800 locations, increasing its scale and opportunity in a core operating area. While LINN Energy gave up potential growth, it added nicely to its portfolio of long-lived assets—the company's specialty.

Look for Vanguard Natural Resources and LINN Energy to keep this type of wheeling and dealing going as they build their portfolios from the scraps the big boys are throwing away. What they do isn't glamorous, but it does provide the foundation for large and stable distributions in an industry that often faces volatile commodity price swings. For income oriented investors, this pair is an interesting way to boost yield in the oil patch.

Reuben Brewer has no position in any stocks mentioned. 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.