Concho Resources Inc. is increasing its 2017 capital budget on an improved commodity price outlook as it looks to benefit from economies of scale with an aggressive drilling program across its core operating areas of the Permian Basin.

Management for the Midland, TX-based Permian-focused exploration and production company said during a 4Q2016 conference call Wednesday that it is increasing its original 2017 capital guidance to $1.6-1.8 billion, up from the $1.4-1.6 billion it guided in November.

CFO Jack Harper said the 2017 capital plan will be “funded entirely through cash flow from operations, and will deliver pure leading production growth of 20-24%.”

Production is expected to trend oilier, he said. “While our capital budget assumes our current expectations for service costs, this outlook does not contemplate additional productivity gains beyond those we received through 2016” or how the company will spend proceeds from the successful sale of its stake in the Alpha Crude Connector pipeline, Harper said.

Concho plans to average 19 rigs for full-year 2017 and is currently running 21 across the Northern Delaware, Southern Delaware and Midland sub-basins in West Texas, as well as its operations in the New Mexico Shelf.

As the commodity price outlook has improved, “industry activity has ramped quickly,” Harper said, “adding inflationary pressures to service costs.” He said Concho was “running the largest drilling program in the Permian, and in this environment size and scale are distinct competitive advantages.”

Added CEO Tim Leach, “I think we have a robust plan that accounts for the service costs that we expect…I would emphasize the size and scale of our company and our ability to keep costs down — because we have so many rigs running and we can keep them running…I think whatever the cost environment is going to be, we’re going to have an advantage.”

Concho has been active in the land grab that has taken place in the Permian. Leach suggested 2017 may mark a transition for the play as producers shift their focus from acquisitions to developing the basin’s stacked targets.

While there are “still opportunities out there that we can get excited about” on the acquisition front, Leach said, “execution is going to be the next theme” for producers in the Permian. “The acquisition part of it’s over with, and now I think we’ll enter a consolidation phase. Big chunks of acreage are valuable because you have to drill these laterals longer and you have to drill them at the same time, and that’s very capital intensive. So I think the nature of the game will change over time. It’s not all going to happen in 2017.”

Leach said Concho would continue to focus on consolidation in its core operating areas as it realizes the benefits of optimized completions, longer laterals and improved well productivity from developing multiple targets simultaneously.

“The way that this shale revolution is playing out, every year is a transition year, it seems like, and you will see some areas that are more and more going into the development mode, and some areas where we’re testing zones and trying to understand how many zones we have, what the economics look like,” Leach said. “I think that this will be a year that you see more intense development in some areas.”

He added, “I think understanding all the zones is dictating how fast we get into this full development mode, where we bring on multiple zones at the same time. That’s a big factor, and that’s happening area by area…in many ways, it does feel like a transition year in that aspect.

“But if you’re talking about the general pace of development, I’m sure everybody remembers that it was just last year everybody was walking around with heads hung down and oil was $28/bbl. So I think a disciplined approach to investing in our properties has paid off for us, and we’re going to be able to drill 300 wells, and we’ll have 300 more data points this year.”

As of year-end 2016, Concho said it has 720 million boe in total estimated proved reserves (59% weighted to oil), a 15% year/year increase. Proved developed reserves totaled 466 million boe at year’s end, a 30% year/year increase, the company said.

Concho added 184 million boe to its proved reserves total in 2016 through drilling and completion and from acquisitions, a 344% replacement ratio not counting price revisions. As of year-end 2016 estimated it had 8 billion boe in net resource potential — a 60% year/year increase — across more than 19,000 gross horizontal drilling locations.

The independent said resource growth was driven by longer laterals and successful density tests in the Northern Delaware targeting the Avalon Shale, Upper Wolfcamp sands and Wolfcamp A zones. In the Southern Delaware, Concho is drilling and delineating the Wolfcamp A, B and 3rd Bone Spring zones. Concho’s acquisitions in the Southern Delaware and Midland formations also contributed to resource growth, the company said.

“The 60% growth in resource over the past year highlights the technical progress we have made across our acreage position,” Leach said. “By increasing lateral lengths, decreasing spacing between wells and delineating new zones we have now identified more resource available per section than ever before. At the same time, we’ve actively worked to increase our positions in our core areas, adding approximately 70,000 net acres and 1 billion bbl of resource through acquisitions in the past year.”

Net production for 4Q2016 totaled 15.1 million boe, or 164,337 boe/d. Oil production totaled 9.2 million bbl (100,217 b/d), with natural gas production totaling 35.4 Bcf (384,717 Mcf/d). That’s an increase over total net production in 4Q2015 of 13.2 million boe (143,954 boe/d), including 8.4 million bbl of oil (91,467 b/d) and nearly 29 Bcf (314,924 Mcf/d) of gas.

“At the start of 2016 our production growth guidance was flat to down 5% over 2015,” Leach said. “Over the course of the year we improved productivity per well, decreased cash costs and strengthened our balance sheet. As a result, we were able to increase production by 5% while spending within cash flow. We remain focused on executing a disciplined capital program and enhancing the impact of each dollar we deploy.”

During the quarter Concho added 16 horizontal wells with at least 30 days of production in the Northern Delaware; six wells in the Southern Delaware; 11 wells in the Midland; and 18 in the New Mexico Shelf.

In the Northern Delaware, average peak 30-day production rates for the new wells totaled 1,316 boe/d (71% oil) with lateral lengths averaging 6,379 feet. In the Southern Delaware, peak 30-day rates averaged 1,252 boe/d (73% oil) with laterals averaging 6,349 feet.

For the Midland, the new wells added during the quarter averaged peak 30-day rates of 1,299 boe/d (85% oil), with laterals averaging 9,601 feet. In the New Mexico Shelf, peak 30-day rates averaged 556 boe/d (84% oil), while laterals averaged 4,643 feet.

Concho said it’s currently running eight rigs in the Northern Delaware, five in the Southern Delaware, six in the Midland and two in the New Mexico Shelf.

Concho’s average prices, not including derivatives, came to $34.70/boe for 4Q2016, up from $29.38/boe for 4Q2015. Oil prices averaged $45.66/bbl, while natural gas prices averaged $2.93/Mcf. That’s compared with year-ago prices of $38.92/bbl and $2.13/Mcf, respectively.

Operating revenues for the quarter totaled $524.6 million, up from $389.2 million in the year-ago quarter. For full-year 2016, revenues totaled $1.6 billion, versus revenues of $1.8 billion for full-year 2015.

Concho posted a net loss for the quarter of $149.3 million (minus 86 cents/share), versus net income of $66.5 million (1 cent) in the year-ago period. For full-year 2016, Concho reported a net loss of $2.1 billion (minus $10.85/share), compared with a net income of $327.2 million (54 cents) for full-year 2015.