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Teekay Offshore Partners, L.P.: Profitable Adventure Or Train Wreck?

The underlying business remains healthy, however relatively small revenue changes have large bottom line effects because of the very high fixed costs.

In the future, this company needs to increase profitability and cash flow. Management needs to expand far more profitably than in the past.

Debt refinancing challenges have been handled at a cost of considerable shareholder dilution.

The DCF calculation needs to be far more conservative in the future to minimize equity dilution. Industry downturns need to be expected when planning financial leverage.

Both preferred and common units offer interesting speculative possibilities provided management focuses on long term results and distributes less cash as a percentage of cash flow.

A lot gets blamed on the downward spiral of commodity pricing that has brought all kinds of grief to investors and horrible financial results to companies. Sometimes, though the companies do not help themselves. The market just sees the claims as unreal as a result. Teekay Offshore Partners (NYSE:TOO), a company specializing in a variety of offshore services is one of those companies.

Source: Teekay Offshore Limited Partners Equity Offering Slide, June, 2016

Source: Teekay Offshore Limited Partners Equity Offering Slide, June, 2016

First of all, if a company is going to make a statement that its earnings are relatively insulated from industry cycles, then it needs to have reported profitable earnings before making that claim. This company has reported profits in the past (at times) and will undoubtedly in the future. But far more important than profits is sufficient cash flow from operations. Sooner or later, the company has to make money to sustain the distributions to shareholders. Sometimes with long lived fixed assets, management can pay out more cash than it should, but then when the bills come for this nearsighted policy, investors discover that part of the company was essentially liquidated. So more equity needs to be raised or risk is increased by increasing the financial leverage.

The first quarter of the current year and the previous year both reported losses, so let's hope that management can improve those results in the future and is not forever locked into some insulated pattern. The second slide shows that costs vary with something, so if it is not oil prices then this company could be subject to a revenue cost squeeze from time to time. Disappearing margins is particularly not appetizing to shareholders. So management should be looking for hedging to protect its results. Since fixed costs are high in this business, small revenue swings produce large results on the bottom line. Unfavorable swings obviously need to be avoided.

The May 19, 2016, Report of Foreign Issuer Rules (Adobe download) shows long term debt in excess of $2.7 billion. But cash flow of only $125 million in the first quarter. That cash flow from operations was a miniscule jump from $121 million the year before. Both cash flows had help from working capital items. In the current year, working capital items were favorable by $53 million. However, in the first quarter of 2015, only $23 million favorable working capital items were available. The ratio of operating cash flow to long term debt was worse than 1:5. That is getting to be a very shaky ratio and explains why the common units outstanding expanded by more than 15 million. The ratio is far worse if the help from the working capital accounts is removed. With the cash flow so low, the DCF statement (or calculation) becomes a trip to fantasy land given management's capital objectives. The balance sheet leverage (long term debt is more than double shareholders' equity including preferred stock) is really not working in the company's favor. Profits really do not matter when the underlying cash flow is not properly supporting those profits.

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