Photo credit: LINN Energy LLC

LINN Energy, LLC (OTC:LINEQ) and LinnCo, LLC (NASDAQ: LNCO) recently reported pretty strong fourth-quarter results. If there was one concern, it was the fact that the company isn't expected to grow its production all that much in the second half of the year. One of the reasons for this is due to the company's plan to explore strategic alternatives for its acreage in Texas' Midland Basin.

The options
I've noted before that I think LINN Energy and LinnCo investors are sitting on a hidden asset when it comes to these acres. While the company has hinted before that it sees potential with these assets, LINN Energy is now officially evaluating multiple strategic alternatives as the company has retained RBC Richardson Barr to assist it with the process.

While the company awaits the outcome of that review, it is simultaneously pursuing a plan that has it drilling 10 horizontal wells on its acres in the second quarter. This is part of the company's $395 million capital plan for the Permian Basin, with 67% of those funds to be spent in the Midland Basin. If the results are really good LINN Energy could decide to keep funding a drilling program and over time drill the 1,085 potential locations it estimates exist on its acres as the slide below details.

Source: LINN Energy Investor Presentation (link opens a PDF)

However, I personally don't see the company engaging in an active horizontal drilling program. The company has noted that it's looking to lower its overall decline rate, which wouldn't happen by drilling a lot of rapidly declining horizontal wells. Instead, I think the company is more likely to either trade some or all of these acres for long-life, mature producing assets. This could be a straight up asset trade or a "like-kind-exchange".

Being a banker
One of the reasons I think this is likely is because of some comments management made on the conference call. CFO Kolja Rockov said that,


Photo credit: LINN Energy

We find ourselves in somewhat a unique position because most of the time when we make an acquisition we go to the capital markets to finance it and now we have an embedded asset that's worth a lot that basically provides us a bank for financing future acquisitions and we put a lot of effort and time into putting a lot of detail out there and I think I am not going to give you a range of value, but I mean there is a lot of public market comps out there and you can take a look at it yourself. And that should give you an idea of what the size of that bank is if you will and it's just pretty compelling.

A great example of what Rockov is talking about was done by Denbury Resources (NYSE:DNR) not too long ago. In late 2012, the company announced that it was selling its Bakken Shale assets to ExxonMobil (NYSE:XOM) in an exchange for cash and assets. The deal closed in two phases and in the first phase Denbury Resources received $1.3 billion in cash as well as ExxonMobil's interests in two mature oil fields. In the second closing Denbury Resources received a portion of ExxonMobil's carbon dioxide reserves in Wyoming to be used for enhanced oil recovery. 

A few months later Denbury Resources used the cash it received from ExxonMobil to purchase a billion dollars in assets from ConocoPhillips (NYSE:COP). By utilizing a "like-kind-exchange" Denbury Resources was able to defer $400 million of the $500 million in cash taxes it would have had to pay on the ExxonMobil deal. What's truly unique about this particular example is how well this worked out from a strategic standpoint. That deal really set up future growth for Denbury Resources as it can use the carbon dioxide it acquired from ExxonMobil to fuel enhanced oil recovery operations on the assets it acquired from ConocoPhillips.

Investor takeaway
LINN Energy's assets in the Permian Basin offer similar potential for a unique deal structure that could add a perfect low-decline, high margin oil asset into the company's portfolio. As its CFO noted, LINN Energy and LinnCo can use these embedded assets as a bank to make a trade and/or buy additional assets. That really is a compelling opportunity that few investors realize exists.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.