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Chesapeake Energy Corporation (CHK), SandRidge Energy Inc. (SD), Kodiak Oil & Gas Corp (USA) (KOG): Is This Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Kodiak Oil & Gas Corp (USA) (NYSE:KOG) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Kodiak Oil & Gas Corp (USA) (NYSE:KOG)

What we’re looking for
The graphs you’re about to see tell Kodiak Oil & Gas Corp (USA) (NYSE:KOG)’s story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at Kodiak Oil & Gas Corp (USA) (NYSE:KOG)’s key statistics:

KOG Total Return Price Chart

KOG Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 3,500% Pass
Improving profit margin 414.5% Pass
Free cash flow growth > Net income growth (2,468.9%) vs. 5,233.8% Fail
Improving EPS 2,600% Pass
Stock growth (+ 15%) < EPS growth 274.8% vs. 2,600% Pass

Source: YCharts.
*Period begins at end of Q4 2009.

KOG Return on Equity Chart

KOG Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 331.7% Pass
Declining debt to equity 694.1% Fail

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we’re going
Kodiak Oil & Gas Corp (USA) (NYSE:KOG) puts up the sort of strong performance — with some caveats — that you might expect out of a fast-growing oil exploration upstart. Free cash flow is in the tank, and debt has risen dramatically, but shouldn’t investors expect such financial trends of a company that’s rapidly expanding its production capacity? The major concerns going forward will revolve around whether this dramatic growth can continue, and whether it can continue in a way that will reverse the free cash flow bleed and bring debt to equity back down again.

Some of our Foolish energy analysts have taken a closer look at Kodiak Oil & Gas Corp (USA) (NYSE:KOG) since its latest earnings report, and they’ve generally come away with positive conclusions. Contributor Matt DiLallo points out that Kodiak Oil & Gas Corp (USA) (NYSE:KOG)’s debt is offset by a fairly deep pool of liquidity, and that Kodiak has done a much better job than larger peers Chesapeake Energy Corporation (NYSE:CHK) and SandRidge Energy Inc. (NYSE:SD) at operating within its financial capacity, which means it’s unlikely to be forced to sell large swaths of promising acreage, as both companies have in the past year. Although free cash flow remains in the dumps, Kodiak’s operating cash has moved into positive territory.

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