As it looks to protect its balance sheet in 2016, SM Energy Co. will focus its drilling and completion activity on the Permian Basin “to the maximum extent possible,” shifting to an oilier mix as it weathers the downturn in commodity prices.

In announcing its 4Q2015 results and guidance this week, SM said it plans to spend about $705 million in 2016 more or less evenly across its acreage in the Permian and the Bakken and Eagle Ford shales. The 2016 capital expenditure (capex) budget marks a shift from 2015, in which SM focused 52% of its budget on the Eagle Ford, with the Permian only accounting for around 20% of 2015 capex. Planned 2016 capex is down more than 45% compared with 2015 capex, management said.

The Denver-based exploration and production company also expects total production to fall noticeably from year-ago levels, albeit with higher per-barrel returns as the mix becomes more heavily weighted to oil with additional production coming online from the Permian and Williston basins in the second half of the year.

Production guidance for 2016 is 51-55 million boe, with 1Q2016 production expected to average 13.1-13.5 million boe. In 4Q2015, production totaled 14.9 million boe, with full-year 2015 production reaching a record 64.2 million boe, 16% higher year/year.

“We are transitioning to spending more in the Permian because at current prices, our program in the Permian generates better cash-on-cash returns and higher operating margins than our Eagle Ford programs,” CEO Jay Ottoson told analysts during the company’s quarterly conference call Wednesday. “Our Eagle Ford volumes, however, are large, and they decline rapidly when you first cut activity. And it takes a while for the Permian volumes to kick in. So overall you get a steep drop in production and then the rate flattens out.

“Our overall operating margin per barrel should improve significantly” with production weighted more to oil, “which will have a positive impact on cash flows and on our debt leverage,” he said. “Look, I know the optics of this initially aren’t great, but it’s the right thing to do in order to optimize cash flow, and cash flow is the lifeblood of our business.”

SM dropped to six operated rigs by the end of 2015 while slowing or postponing completions across its major operating areas. The independent also significantly reduced third party Eagle Ford operating activity. The company is currently operating one rig in the Eagle Ford, two in the Bakken and one n the Permian, with plans to redeploy a second rig from the Eagle Ford to the Permian later this year.

SM expects to draw on its inventory of drilled but uncompleted wells throughout the year, management said, with 115 planned net completions in 2016.

CFO Wade Pursell said SM has currently drawn around $200 million on a $1.5 billion revolving credit facility, with that credit line based on a $2 billion borrowing base.

The company’s 2016 business plan “run at current strip pricing stays within this level,” Pursell said. “And looking ahead to 2017, we have a plan that stays below four times as well, assuming oil prices average $45/bbl and natural gas $2.75/MMBtu. These prices approximated a recent strip…

“Now while we believe prices will be at or above these levels in 2017, we obviously will not bet the balance sheet on it. Accordingly, we’ve already had discussions with our banks about changing this covenant to something we would be much more comfortable with should prices not recover.”

He said he also anticipates the borrowing base to fall during the upcoming spring redetermination to a level “below the $1.5 billion commitment level, but not too far below that level. So we will still have significant liquidity available to us.”

SM finished 2015 with 471 million boe in proved reserves, down from 522 million boe as of year-end 2014, primarily on commodity price-related negative revisions. Pre-tax present value discounted at 10%, or PV10, of 2015 year-end proved reserves was $1.8 billion using Securities and Exchange Commission pricing. Reserves were 45% weighted to natural gas, 31% to oil and 24% to natural gas liquids.

Management said hedges are in place for more than 30% of projected 2016 oil production at an average price of $88.01/bbl West Texas Intermediate, and more than 55% of projected natural gas production at $3.61/MMBtu.

Net losses were $340.3 million (minus $5.01/share) in 4Q2015, compared with profits of $331.7 million in the year-ago quarter. SM took a $344.2 million charge for impairments on its reserves.

For 2015, net losses were $722.9 million (minus $6.61/share), compared with a net income of $666.1 million for 2014.