Shares of PG&E (NYSE:PCG) were up 10% on Tuesday afternoon, continuing the stock's surge in the days since the bankrupt utility announced a settlement with victims of California's wildfires. Shareholders are growing more confident that they will receive some recovery as part of the company's reorganization. If so, how much higher could PG&E shares climb?
PG&E entered bankruptcy nearly a year ago to manage an estimated $30 billion in liabilities stemming from 2017 and 2018 wildfires. Equity holders typically are wiped out in a reorganization, and shares typically drop below $1 apiece, but PG&E shares have been an exception to the rule because the company has said it intends to preserve some value for shareholders in its plan.
That assumption came under fire after the court allowed creditors to file competing plans. But PG&E's settlement deal, announced last Friday, seems likely to secure the company the support of wildfire victims, and it means a plan put forth by debt holders that would have wiped out equity investors is less likely to be approved.
PG&E said it has received more than $12 billion in equity backstop commitments to support the settlement and its reorganization.
PG&E shares are up more than 40% over the past five days but down by nearly 50% year to date. The odds of PG&E shareholders getting some recovery out of the reorganization have gone up, but the amount they will receive is still a matter of debate.
PG&E's restructuring plan, according to media reports, calls for the reorganized company to be worth between $30 billion and $35 billion upon emergence, with at least $20 billion of that equity value to go to fire victims and new money coming in. That leaves between $10 billion and $15 billion potentially available for existing holders, meaning the shares could be valued as high as $18 to $28 apiece, well above the current $12-per-share price.
Of course, the plan still must be approved by the court and backed by regulators, and it is unclear whether that $30 billion valuation will hold or if other parties will get a share of the equity. PG&E is hopeful of emerging from bankruptcy by June 30, 2020, but that is a long six months away, and a lot could change in the months to come.
Shares of PG&E traded above $45 apiece as recently as November 2018, meaning that long-term holders are likely to take a hit even in the best of circumstances. And given all the complications surrounding the reorganization, I wouldn't conclude with any certainty that the equity will go much higher than the current price.
Leave PG&E shares to the speculators and short-term traders.