What happened

Shares of PG&E (NYSE:PCG) lost nearly half of their value in two trading days as a new wave of wildfires and power shutdowns cast fresh doubts on the bankrupt utility's restructuring plans. On Tuesday bargain hunters stepped in, sending PG&E shares up 16% in an apparent wager that the recent sell-off is overdone.

So what

PG&E filed for bankruptcy protection in January, seeking to reorganize to get out from under about $30 billion in wildfire liabilities stemming from the 2018 Camp Fire in northern California. The company's plan from the beginning has been to allow for some recovery for equity holders, meaning that unlike in most bankruptcies the stock has retained some of its value throughout the process.

High voltage lines coming out of a utility transmission station.

Image source: Getty Images.

The odds of equity holders getting substantial recovery have taken a hit in recent weeks, causing the stock to fall. The judge overseeing the bankruptcy ruled to allow alternative plans filed by creditors to be considered along with the company's reorganization plan. PG&E is also dealing with new issues stemming from the still-burning Kincade Fire in Sonoma County, as well as efforts to cut power to residents as a precaution against additional fires.

None of the headline risk surrounding PG&E disappeared overnight, and the fires are still burning. PG&E did report progress restoring power to more than half of the customers impacted by its Oct. 26 shutoff, but Tuesday's stock jump appears to be fueled by traders believing the recent sell-off has created a buying opportunity.

Now what

PG&E's future is at the mercy of the bankruptcy court, and no one knows what the ultimate outcome of the reorganization will be or what recovery will be available for equity holders when all is said and done. Until the reorganization is complete, PG&E shares are best held by speculators and not by long-term investors.

There's a place in an income-focused portfolio for high-quality utility stocks, but until PG&E is able to sort out its reorganization and come up with a plan to deal with future wildfire liabilities, investors should focus elsewhere.