Longview

What: Shares of Memorial Resource Development (NASDAQ:MRD) plunged more than 15% by 12:30 p.m. EST on Wednesday. Driving the sell-off was the company's operational update and 2016 guidance.

So what: Memorial Resource Development said that its fourth-quarter production averaged 426 MMcfe/d, which lifted its full-year production average to 345 MMcfe/d. That's 72% higher than what the company produced in 2014 after it invested $511 million on drilling and completing new wells last year. However, despite all that capital and production growth, proved reserves were flat year over year, at 1.4 Tcfe.

Looking ahead to 2016, Memorial Resource Development plans to invest $350 million to boost its average daily production to between 390 to 420 MMcfe/d, which is 18% higher than last year at the midpoint of the company's guidance range. It expects to fund this investment with internally generated cash flow.

In addition to this, Memorial restructured its hedges. According to the company, it "exchanged existing 2018 oil and natural gas hedges with a total volume of 270,896 MMBtue/d for new oil swaps in 2016 relating to 1,776 Bbls/d at an average price of $95.93 and new NGL swaps in 2016 relating to 8,224 Bbls/d at an average price of $44.55." In other words, it pulled forward the value of its 2018 hedges. In doing so, 100% of its production in 2016 is now hedged, which strengthens its 2016 cash flow to back its capital spending plan at the risk of cash flow in 2018. 

Investors really don't like Memorial Resource Development's 2016 guidance because the company is focused on delivering "peer-leading production growth" when the market is already oversupplied. Worse yet, its paying for some of this near-term growth at the risk of leaving it more exposed to commodity price volatility in 2018.

Now what: Memorial Resource Development is betting that its growth will pay off; but the market doesn't agree. Instead, the market sees the company wasting growth, and putting its future at risk if this bet doesn't pay off.

Matt DiLallo 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.