One would think that Plains All American Pipeline (PAA -0.23%) is performing poorly this year: Its units are down 20% since the start of the year even as many other large master limited partnerships (MLPs) have at least managed to stay flat amid slumping oil prices. The sell-off in Plains All American Pipeline comes despite the progress it made in shoring up its balance sheet, which gives it the finances needed to construct several compelling growth projects. It's an improving picture that investors seem to have overlooked.

An improving financial picture

Plains All American Pipeline was one of the many MLPs that struggled during the recent oil-market downturn. Because of weak commodity prices, customers pulled back spending on new wells, causing volume declines across many of Plains' systems. Furthermore, those weaker prices caused margins to come down on assets for which the company has direct exposure to prices. These issues put downward pressure on cash flow, causing debt to adjusted EBITDA, a measure of leverage, to balloon to nearly 5.0 -- well above the company's 3.5-4.0 target range -- and the distribution coverage ratio to sink below 1.0. Given the unsustainability of those metrics, Plains took steps to shore up its financial situation, which included completing a transaction with parent company Plains GP Holdings (PAGP) that resulted in the reduction of its distribution.

An oil pipeline coming from an oil pump.

Image source: Getty Images.

However, as a result of these actions, the company's financial metrics are heading in the right direction. Leverage on a go-forward basis was down to 4.4 times last quarter. Furthermore, the company expects cash distributions to be just $25 million more than its projected $1.54 billion of distributable cash flow this year, which is primarily due to. It's a shortfall that the company has fully covered with capital-raising efforts -- equity issuances and asset sales used to finance growth initiatives. In fact, it expects to have $216 million in cash to spare, with that excess going toward debt reduction. Meanwhile, those growth initiatives should boost cash flow in future years, which should give Plains more breathing room to potentially start increasing the distribution again.

Growth projects are gaining steam

Speaking of growth, Plains All American Pipeline has undertaken several initiatives to boost cash flow. The largest was the $1.2 billion acquisition of the Alpha Crude Connector system, in Texas and New Mexico, from Concho Resources (CXO) and Frontier Midstream Solutions. That system should supply Plains with steady cash flow because Concho Resources signed a 10-year service agreement underpinning the network that started in 2015. Meanwhile, Plains intends to invest capital into the system to support Concho's expansion, which should lead to incremental cash flow growth for Plains.

In addition, Plains All American Pipeline plans to invest $900 million this year on projects that should enter service over the next year. The largest is the Diamond Pipeline joint venture with Valero Energy (VLO -0.09%), which should begin flowing cash to Plains by the end of 2017. The Oklahoma-to-Tennessee pipeline is a very compelling project because Valero is financing half the cost as well as supporting it with a 10-year minimum-volume contract that should supply Plains with stable cash flow for a decade. The company has several other smaller projects under construction focused on the high-growth Permian Basin of Texas and the STACK play in Oklahoma.

These growth initiatives support Plains' view that it can grow adjusted EBITDA from about $2.26 billion this year to $2.65 billion in 2018. Meanwhile, additional projects in the backlog, as well as those under development, could push earnings up to $3 billion annually over the next several years. That's a more-than-30% increase, which could give Plains the cash flow to support healthy distribution growth in the future.

Investor takeaway

Investors have sold off Plains All American Pipeline this year, overlooking all the progress it made to improve its financial situation and growth prospects. Those initiatives put the company on pace to deliver robust growth in the years ahead while continuing to improve its finances, which should result in the company being able to start increasing its already bountiful distribution. It's a situation that could yield healthy returns for investors who pounce while the market isn't paying attention.