Barclays: Iran War Boosts Fuel Costs, Waste Management Stocks Expected to Benefit from Fuel Surcharge

Investing.com - Barclays analysts say that waste management companies with comprehensive surcharge mechanisms can effectively respond to fuel cost increases caused by the Iran war.

Barclays told clients that WM, RSG, and CLH “may be net beneficiaries of rising fuel/energy prices.”

Against the backdrop of global energy price fluctuations triggered by the conflict, the defensive characteristics of this sector have shown attractiveness. Since the war began, Barclays’ coverage of waste management portfolios has outperformed the S&P 500 by about 200 basis points, excluding MEG.

Analysts state that fuel costs account for an average of 3.7% of the annual operating costs of covered waste management companies, and any cost increases are expected to be broadly offset through surcharge plans.

For Waste Management (NYSE:WM), the surcharge plan can offset higher fuel costs on an annual basis dollar-for-dollar, despite a short-term lag of one to three months in residential contracts with prepay bills. The company may also benefit from higher prices for renewable natural gas produced but not yet contracted.

Republic Services (NYSE:RSG) operates a fuel recovery surcharge that can offset 1.6 times the higher fuel costs, making higher fuel costs both a revenue and profit margin benefit. Barclays estimates that a $0.50 per gallon increase in diesel prices will drive a 0.7% increase in adjusted EBITDA in 2026. The costs are updated with a one-month lag.

Waste Connections (NYSE:WCN), which mainly passes higher costs through base prices, has 30% to 40% of its books with surcharges. A $0.50 per gallon increase in diesel prices would lead to a 0.4% decrease in adjusted EBITDA in 2026, but this does not reflect the offsetting effect of higher base prices.

GFL Environmental’s surcharge now covers 100% of direct fuel costs, up from 40% in 2022. The surcharge is set with a one-month lag and has a net neutral impact on an annual basis.

Casella Waste Systems’ surcharge plan can offset most of the higher fuel costs. It is estimated that a $0.50 per gallon increase in diesel prices will lead to a 0.1% decrease in adjusted EBITDA in 2026.

Clean Harbors’ fuel recovery surcharge is updated twice a month and is linked to diesel prices. This mechanism typically slightly thickens profit margins in a rising price environment.

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