The market has pummeled master limited partnerships (MLPs) over the past few years due to the impact the oil market downturn had on their operations and business model. Among the hardest-hit have been oil pipeline MLP Plains All American Pipeline (PAA 1.15%) and gas pipeline giant Energy Transfer Partners (ETP), both of which have lost more than half their value over the last three years. That persistent slump comes even though their turnaround strategies are beginning to gain steam. While these companies still have some work to do before they're back on solid ground, both could deliver significant returns as they complete their plans and the oil market continues rebounding over the next few years. That upside potential makes them compelling options for investors with a higher tolerance for risk.

Ready for the uptick

After steadily growing for several years, Plains All American Pipeline's earnings peaked in 2013 and have steadily declined ever since. While EBITDA only slid from $2.3 billion in 2013 to $2.1 billion last year, distributable cash flow dropped from about $1.7 billion ($2.56 per share) to $1.3 billion ($1.82 per share). That decline in cash flow made it impossible for the company to maintain its overly generous cash distribution rate to investors, ultimately forcing the company to slash the payout in 2016. Plains would go on to cut it again last year, this time to free up cash to pay off debt -- which had grown to an uncomfortable level of 5 times EBITDA -- and finance expansion projects.

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Image source: Getty Images.

Plains All American Pipeline's turnaround strategy is already starting to deliver results. The company had reduced debt $1.5 billion by the end of last year and expects to hit its leverage target of 3.5 to 4 times debt to EBITDA in early 2019. The company has also invested heavily in building assets supported by fee-based contracts that should provide it with steadier cash flow in the future. As a result, Plains sees earnings rebounding back up to $2.3 billion this year while cash flow should improve to $1.5 billion ($2.03 per share), which is enough to cover its reset distribution by a comfortable 1.7 times.

Meanwhile, the company has more growth coming down the pipeline via the nearly $2 billion of expansion projects it has underway that should enter service over the next two years. The uplift from those projects, when combined with the company's improving balance sheet, positions Plains to start increasing its 4.9%-yielding distribution next year. This combination of an improving financial profile and a return to growth has the potential to fuel substantial total returns for investors in the coming years, especially as the oil market keeps improving.

Already starting to turn

Energy Transfer Partners is a bit further along in its turnaround process, as earnings already turned the corner in the second quarter of 2017. The company's financial results and balance sheet have continued improving since then. However, the pipeline giant still has work to do.

For starters, the company ended last year with a debt-to-EBITDA ratio of 4.3, which, while an improvement from 5.5 at the beginning of the year, was still higher than its target of 4. Energy Transfer has taken several actions to push that number lower this year, including selling assets. However, the company faces a tough balancing act since it's trying to fund a $10 billion expansion program at the same time it's distributing all its cash flow to investors and working to whittle down debt.

So far, the company has managed to walk that tightrope and maintain what's now a 12.5%-yielding distribution even as it spends billions to expand. As those projects come on line, they'll provide some incremental cash flow that will help reduce the leverage ratio and improve distribution coverage. While that doesn't guarantee that the company will maintain its sky-high distribution -- because it has some other issues to address -- the odds are increasing with each passing day.

The recipe for high returns

Plains All American Pipeline and Energy Transfer Partners are slowly turning things around. However, despite that progress, the valuations of both companies remain at depressed levels. As the weights holding them down continue lifting, it should take their values up with them. Add in the growth both anticipate from their expansion projects, with the income streams each currently produces, and they have all the ingredients needed to deliver a big-time total return in the coming years.