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Top broker says there’s a $4 billion re-rating opportunity for this ASX 200 stock

It’s hard to think about buying stocks in this volatile environment as the world could be on the brink of an all out trade war as the US is threatening to increase tariffs on Chinese imports in just a few hours.

ASX investors clearly believe that a trade war will be averted at the eleventh hour given that the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has inched up into the black in late morning trade with the TPG Telecom Ltd (ASX: TPM) share price, the New Hope Corporation Limited (ASX: NHC) share price and Iluka Resources Limited (ASX: ILU) topping the leader board.

But there’s another large cap stock that could be outperforming in the coming weeks and that stock is oil and gas engineering group Worleyparsons Limited (ASX: WOR).

A 60% share price rerating opportunity?

The WorleyParsons share price has been on a roller coaster ride this year that’s driven in no small part by the fluctuating oil price and its large US acquisition of Jacobs’ Energy, Chemicals & Resources division (ECR) for US$3.3 billion.

It seems to me that the market is unwilling to give management the benefit of the doubt in regards to synergies from the ECR transaction but all that could change on 5 June when it holds its investor day.

Macquarie Group Ltd (ASX: MQG) thinks the event could be a re-rating opportunity for the $7.2 billion market cap stock, which could generate a 60% return for investors over the next 12-months from capital gains and dividends.

Upside from ECR acquisition

WorleyParsons believes it can achieve $130 million in cost synergies alone in two years from the acquisition and there is further upside from potential sales synergies (cross selling) given that ECR delivers a new global chemicals footprint for the group, integrated upstream and downstream oil and gas offering and a low-cost delivery centre of excellence in India.

“Customer capex budgets looking firm with WOR referring to 5% linear growth (oil & gas), but project approvals are accelerating at a faster rate than that. WOR noted a broad base of capex increases geographically speaking and across hydrocarbons, chemicals and minerals & metals,” said the broker.

“WOR has more exposure to the cyclical capex side of the business, however post completion, this will be more balanced with 50/50 opex revenue vs capex revenue. The rise in oil prices since December 2018 also means that customers should have more confidence to move forward with expansion plans.”

Macquarie has an “outperform” recommendation on WorleyParsons and a 12-month price target of $21.38 per share.

I think WorleyParsons is cheap too and have an overweight position in the stock as I see it as a better way to gain leverage to the oil price than investing in energy stocks. It’s much like backing the guy who sells the shovel during a mining boom.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and WorleyParsons Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.