Please ensure Javascript is enabled for purposes of website accessibility

Shares of Memorial Resource Development Tank After Earnings

By Tyler Crowe – Feb 24, 2016 at 2:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earnings came in just where analysts expected, but investors were none too pleased with the results.

Image Source: Memorial Resource Development investor presentation.

What: Shares of Memorial Resource Development (NASDAQ: MRD) are down more than 17% as of noon today. At first glance, the company's earnings looked pretty solid, but investors who were hoping to see continued growth in 2016 were likely disappointed with the company's 2016 guidance.

So What: There are probably a handful of companies that would have given their left arms for a fourth-quarter result similar to Memorial. Production increased by 64%, costs decreased, EBITDA increased compared to the same quarter last year, and the company remained cash-flow neutral throughout the year.

The big difference for investors, though, was that the company's net income slides considerably when you consider the gains from oil and gas hedges. Net income came in at $17 million per share compared to $170 million this time last year. It may be a big drop, but it's one of the few producers that can claim to be profitable today.

The reason why investors didn't receive this news well, though, is because the company's guidance calls for a scaling back of its spending and production growth. Memorial's management is expecting to lower its average active rigs to four on its acreage, down from nine in 2015. Also, the company is planning on not completing several of its wells in the year because of lower oil and gas prices. Considering that Memorial was one of the last bastions in the oil patch putting up large growth numbers, this one can sting a little.

Now What: All in all, Memorial Resource Development had a decent quarter, especially compared to some of its peers that are teetering on the verge of bankruptcy. Investors might knock it for its ownership of Memorial Production Partners (NASDAQ: MEMP) -- which posted some big losses after a large asset writedown; but it seems that today's big price drop is an overreaction.

The important thing to watch with Memorial in the future is whether oil and gas prices pick up before some of its hedges expire. Without the protection of hedges, Memorial's results won't look as strong.

Tyler Crowe has no position in any stocks mentioned. You can follow him at or on Twitter @TylerCroweFool.

The Motley Fool has no position in any of the stocks mentioned. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.