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Why Shares of PG&E Are Surging Today

By Lou Whiteman – Updated Dec 4, 2019 at 1:21PM

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The bankrupt utility is rumored to be near a deal that would preserve its equity value.

What happened

Shares of PG&E (PCG -0.26%) traded up more than 15% at 1:15 p.m. EST Wednesday on talk that the bankrupt utility is nearing a deal to compensate wildfire victims. If a deal is reached, it would improve the chances that PG&E will retain control of its reorganization, which in turn would make it more likely that current equity holders won't be wiped out in the process.

So what

PG&E filed for bankruptcy protection in January, attempting to manage an estimated $30 billion in liabilities stemming from the 2018 Camp fire in Northern California. Although equity holders are often wiped out in a bankruptcy reorganization, shares of PG&E have continued to trade on the hope that the company will preserve some value for shareholders as part of its reorganization plan.

That assumption has come under pressure in recent months, following complaints from wildfire victims and creditors that they were not being adequately compensated. In October, the court allowed creditors to file competing reorganization plans, a move that could cost PG&E control of how it exits bankruptcy.

Power utility lines.

Image source: Getty Images.

A group of creditors led by Pacific Investment Management and Elliott Management have a competing plan that would all but wipe out current stockholders, handing control over to creditors.

If the rumors are correct that PG&E is near a deal to pay $13.5 billion in cash and stock to resolve claims and win the support of wildfire victims, the chances that the company can retain control of its reorganization and emerge with its equity base intact would increase greatly.

Now what

While the latest news is positive for equity holders, the stock has still lost about half of its value in the last six months. Shares have been highly volatile throughout the year and are likely to remain so until the utility has a plan confirmed and exits bankruptcy.

If and when PG&E is able to emerge, and if California comes up with a long-term plan to manage wildfire risk, the utility might be a candidate for a buy-and-hold investor. But that day is a long way off, and for now these shares are best left to short-term speculators and momentum traders.

Lou Whiteman 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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