Exoneration Does Not Change The Investment Thesis on PCG Stock

The Tubbs Fire was just one of many PG&E could have been liable for

PG&E (NYSE:PCG) exploded late in Thursday trading. Traders found relief as the California Department of Forestry and Fire Protection absolved the utility of any fault related to the Tubbs Fire. PCG stock surged by almost 75% to $13.95 per share following the release of this news late in the Thursday trading session. So far in Friday’s trading, the rally has settled a bit, and PCG stock price hovers around 12.40.

However, they still face tens of billions in liability related to 17 other fires, which killed at least 13 people. They also face some likelihood that investigators will find them at fault in the Camp Fire — the deadliest fire in California history. Hence, a huge chance of bankruptcy remains. For this reason, investors should probably avoid PCG stock despite the move higher.

PCG Stock Spiked on Tubbs Fire News

According to state fire officials, a private electrical system caused the Tubbs Fire. They said PG&E beared no responsibility for the fire, which burned almost 37,000 acres in Napa and Sonoma counties and killed 22 people.

The news heartened owners of PCG stock as the price of the equity spiked higher. However, the firm still bears responsibility for 18 wildfires that occurred in 2017. Fire officials have also not exonerated the company in the Camp Fire. That blaze killed 86 people, and PG&E admitted that a high-voltage line failed in this area before the fire started.

PG&E Not Out of the Woods

Investors should also note that even without liability from the Tubbs Fire, the costs related to other fires could still push the company into bankruptcy. Analysts had estimated the total damages at about $30 billion. Although that figure includes the Tubbs Fire, the company still faces billions in fire-related liability. Moody’s cut PG&E credit rating to junk status. They said that the decision regarding the Tubbs Fire would not change that rating.

Not all agree that this will lead to bankruptcy for PCG stock. To be sure, the PCG stock price of almost $13 per share implies less of a danger of bankruptcy. Moreover, a bailout from the State of California remains possible. However, Governor Gavin Newsom has shown no interest in such a move.

Hence, investors should approach this stock on the likely assumption of a Chapter 11 filing. At this stage, buying PCG stock amounts to a gamble that the company will avoid liability in the Camp Fire. Given the utility’s admittance of a power line failure in the area, that seems like a bet investors are unlikely to win.

PG&E Not the Usual Utility Stock

Also, as I mentioned in a recent article, utility stock investors do not sign up for this kind of turmoil. Usually, investors buy utility stocks for stability and dividend income. They want firms such as Dominion Resources (NYSE:D), Duke Energy (NYSE:DUK), or Southern Company (NYSE:SO) that quietly generate power, deliver service, and distribute profits among shareholders.

Prospective buyers should also remember the fact that this company holds a monopoly in providing the energy needed to sustain life. Even with that guaranteed book of business, they still face Chapter 11. One can debate whether the PG&E management team or poor forestry management in the state led to this point. However, no matter where the fault lies, the investment decision remains the same.

Even if the company avoided bankruptcy, liability costs would preclude a return of the dividend for years to come. Hence, all signs point to PCG stock as a high-risk gamble at best.

The Bottom Line on PCG Stock

Despite the surge in PCG stock, risks remain incredibly high, and even risk-tolerant investors would likely see better results looking elsewhere. Although PG&E will not bear any liability from the Tubbs Fire, the utility still faces tens of billions in liability stemming from other blazes. Given that cost and the decreasing likelihood that the firm will receive a bailout, speculative investors should look to other equities.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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