What happened

Shares of Kosmos Energy (NYSE:KOS) had jumped more than 10% by 1:30 p.m. EST on Wednesday. Fueling the oil stock was a combination of higher oil prices and positive notes by analysts following its fourth-quarter results yesterday.

So what

Oil prices continued their climb today. The global oil benchmark, Brent crude, rose more than 2%, pushing it close to $67 a barrel. That rising tide is lifting nearly all boats in the oil market today since it should enable oil producers like Kosmos Energy to generate more cash.

An offshore rig at dusk.

Image source: Getty Images.

The company's leverage to higher oil prices was apparent this week when it reported better-than-expected fourth-quarter results. It generated $99 million of free cash flow as a result of improving oil prices during the quarter. Thanks to that and asset sales, it ended the year with a solid balance sheet with good liquidity.

Most analysts liked what they saw from Kosmos during the quarter. Goldman Sachs upgraded the stock from neutral to buy while setting a six-month price target of $4.50 a share, implying nearly 60% upside. The investment bank sees "underappreciated value" in its Tortue LNG project that should come on line in 2023, and "rapid deleveraging" thanks to its ability to generate free cash flow in the current environment. Meanwhile, Barclays also boosted its price target on the stock.

However, not all analysts see as much near-term upside. Berenberg downgraded Kosmos from a buy to a hold due to valuation following its recent rally. But Berenberg did nudge up its price target from $2.75 to $2.95 a share.

Now what

The continued rally in oil prices is a gift to oil companies. It's enabling producers like Kosmos to generate an increasing amount of free cash flow that most are using to shore up their balance sheets. That upward trend could continue if oil prices stay hot. But Kosmos' stock could stumble if they cool off, which is why investors should keep a close eye on crude prices.

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.