August 30, 2016

Teekay’s Confidence And Adjusted ROA Improvements Contradict Bearish Expectations


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.

TOO

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.

TOO 1

Valuation Matrix – ROA’ and Asset’ Growth as Drivers of Valuation

When valuing a company, it is important to consider more than a singular target price, and instead the potential value of a firm at various levels of performance. The below matrix highlights potential overvalued or undervalued prices for TOO at various levels of profitability (in terms of ROA’) and growth (Asset’ growth). Prices that are in excess of 10% equity upside are highlighted in black, and prices representing an excess of 10% equity downside are highlighted in red.

TOO 2


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