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Why PG&E Stock Just Rebounded 35%

By Rich Smith – Nov 16, 2018 at 12:50PM

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California could step in to save PG&E from bankruptcy.

What happened

With the risk of PG&E Corporation (PCG 0.97%) incurring catastrophic losses from its (presumed) role in California's "Camp Fire" wildfire growing by the day, the company received a rare bit of good news today.

California's Public Utilities Commission President Michael Picker "can't imagine allowing the utility to go bankrupt" (reports Bloomberg), and Picker says PG&E needs "stability and economic support to get the dollars they need right now."

And with that news in hand, Citigroup just upgraded PG&E stock to "buy."

Power lines in California

Image source: Getty Images.

So what

PG&E faces many billions of dollars worth of potential liability from the still-raging and uncontained Camp Fire wildfire -- on top of billions more in potential liability from other wildfires it may have played a part in creating in 2017. The amounts PG&E may be forced to pay out greatly exceed the $1.4 billion in insurance it's taken out to protect itself against such risks, which creates the very real risk that PG&E could find itself insolvent in the not too distant future.

However, here's the thing: PG&E provides gas and electric service to some 16 million customers in northern and central California. The state can't simply let PG&E go belly-up and turn off the lights to so many citizens -- which is why the PUC president says he "can't imagine" allowing PG&E to go bankrupt.

In Citigroup's view, what this statement amounts to is a good chance that California will cap PG&E's liability at an amount that it can afford to pay -- preventing the company from going bankrupt, and preventing PG&E stock from going to zero.

Now what

Of course, there's still a great yawning gap between "zero" and PG&E's current stock price of nearly $24 a share. Meanwhile, at $12.4 billion in current market capitalization, PG&E's value as a company is currently still well below what many experts are saying is its potential legal liability for Camp Fire and other wildfires.

If you ask me, Citigroup is upgrading this stock too soon, and there's still plenty of room for PG&E stock to fall before all of this is over.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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