Shares of California-based utility PG&E (NYSE:PCG) have crashed in the past week, losing more than 50% of their value because of the role the company may have played in starting the wildfires in Northern California. That sell-off has hurt the company's investors who mainly bought because they thought they were getting a low-risk income stream. In this Industry Focus: Energy clip, host Nick Sciple and Fool.com contributor Matt DiLallo discuss how investors should frame this loss, what might happen to PG&E in the future, why the company maxed out its credit facility, and whether it's a buy after the sell-off.
A full transcript follows the video.
This video was recorded on Nov. 15, 2018.
Nick Sciple: First off on the show, I wanted to talk about the fires out in California. First off for our listeners, I want to say, our thoughts and prayers out to everyone that's been affected. There's been multiple people who've passed away or have been dislocated from their homes, some people that are still missing. Since we're an investing show, we want to talk about how these sorts of things are going to affect investors. The biggest story this week related to the California fires has been PG&E. PG&E is the largest utility in California, over 5 million customers. It's down over 50% this week. I saw this morning it was down another 20%, over rumors that a defect in their equipment may have been to blame for causing the wildfires that are ravaging California right now.
Matt, I want to ask you, investors in a company like PG&E bought into a utility stock that was supposed to be stable, pay a dividend over time, be very predictable. And now, you're seeing this liability coming up from the fire that's really changed the whole narrative for the company. When you encounter situations like this in your holdings or your investments, what do you think is the most appropriate way to respond to something like this? It just comes out of nowhere and changes the entire dynamic of the business that you're holding.
Matt Dilallo: This is a tough situation. Again, my heart goes out to California. My uncle lives out there. I know that the smoke in the air is making the air quality bad. It's a tough situation for those people out there. It's hard to then switch gears and talk about investing. Investors are just losing money. Nobody wants to lose money, but losing your house or your life... so I guess investors should frame it that way first. It is money. It's really not ever fun to lose money. Especially the type of investors that would be in a stock like this. They're looking for the dividend. It's the low-risk investments. It's a reminder to us all that there's no such thing as low-risk in investing. There's things that come out of nowhere.
There's the BP disaster a couple years ago. That company made a mistake and created this huge environmental disaster. In this case, we have fires here that potentially were caused by an electric malfunction. If that's the case, it could really devastate the company, because they could be held liable for a lot of this damage. I saw that they had taken out their line of credit. The bank's basically given them a credit card, and they maxed it out and put that cash on the balance sheet. That's preparing themselves for not being able to access money in the future. If they're held liable, they're not going to be able to issue bonds or sell stock.
It doesn't look good for investors here. I saw this happen a lot during the oil market downturn. When companies were about to declare bankruptcy, they would max out their credit, so they have that liquidity. I wouldn't say rush out and sell, because you don't know what's going to happen. But it doesn't look good for investors in this stock.
Sciple: Exactly right. It's hard to know where to proceed from here. There's so many unknowns. If it turns out that they're not liable, you've got a double if it were to return to the previous levels. But it's so hard to know. There are so many question marks in the air.
Dilallo: I would not be buying hoping for that to happen. As a human being, you hope that the fires are put out quickly. You hope for the people who work for this company that they don't go bankrupt. But I wouldn't be buying on that hope.