Teekay's Confidence And Adjusted ROA Improvements Contradict Bearish Expectations

Aug. 30, 2016 2:16 PM ETTeekay Offshore Partners L.P. (TOO)
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Summary

  • Teekay Offshore Partners LP is expected to see a declining Adjusted ROA (ROA’), but management’s confidence in their better cash profile indicate that this is unwarranted.
  • TOO is trading at a 1.2x Adjusted Value to Assets Ratio (V/A’), near historical lows.
  • Management’s confidence in their improving liquidity and sustainable cash flows indicate that market expectations appear unwarranted, and that equity upside and multiple expansion may be justified.

Performance and Valuation Prime™ Chart

The PVP chart below reflects the real, economic performance and valuation measures of Teekay Offshore Partners LP (NYSE:TOO) after making many major adjustments to the as-reported financials. This chart, as well as the detail behind the graphics, can be found here.

The four panels explain the company's historical corporate performance and valuation levels plus consensus estimates for forecast years as well as what the market is currently pricing in, in terms of expectations for profitability and growth.

The apostrophe after ROA', Asset', V/A', and V/E' is the symbol for "prime" which means "adjusted." These calculations have been modified with comprehensive adjustments to remove as-reported earnings, asset, liability, and cash flow statement inconsistencies and distortions. To better understand the PVP chart and the following discussion, please refer to our guide here.

The firm has seen historically volatile ROA' performance, collapsing from a peak of 10% in 2005 to a mere 2% in 2006, before modestly recovering to 6% in 2008. ROA' then ranged from 4%-6% levels in 2008-2014, before climbing to 8% in 2015. Meanwhile, Adjusted Asset (Asset') growth has been largely non-existent outside of the firm's 58% and 29% growth in 2006 and 2015, respectively.

Performance Drivers - Sales, Margins, and Turns

It can be helpful to break down ROA' into its DuPont formula parts, Earnings' Margin and Asset' Turns, which are the cleaned up margins and turns metrics used to calculate ROA'. The chart below details both Earnings' Margin and Asset' Turns historically, to help us better understand the drivers of the firm's profitability and performance. The detail behind the chart can be found here.

Trends in the firm's volatile ROA' have been driven by fluctuations in Earnings' Margin. Earnings' Margins collapsed from 31% in 2005 to 9% in 2006, before rebounding to 18% in 2007. Earnings' Margins then remained relatively stable from 2007-2014, ranging

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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