Analyst Cuts PG&E Price Target By 50%, Remains Bullish On Underlying Fundamentals

PG&E Corporation PCG stock bounced back to life Wednesday following some bullish commentary from Wall Street after a disastrous start to the week.

The Analyst

Bank of America analyst Julien Dumoulin-Smith reiterated his Buy rating for PG&E but cut his rice target in half from $44 to $22.

The Thesis

CNBC reported Monday the company could face a minimum of $30 billion in liabilities related to California wildfires in 2017 and 2018, citing unnamed sources. The CNBC report followed a Reuters story over the weekend suggesting the utility is considering a bankruptcy filing and will potentially be taking a major financial charge in Q4.

After Monday's close, S&P Global cut PG&E Corp’s credit rating from BBB- to B, a move that drops the company’s debt from investment grade to “highly speculative” non-investment grade, or “junk” status.

According to Dumoulin-Smith, PG&E shareholders face extreme risk due to the probability of a bankruptcy filing, but the company’s underlying fundamentals outside of its wildfire liabilities are sound. Despite the bankruptcy fears, Dumoulin-Smith said the state of California will likely prefer a different route.

“We believe California leadership understands the broader translation of higher cost of capital to ratepayers is likely worse via a bankruptcy rather than a tangible financing solution for current wildfire liabilities, based on Governor Newsom’s comments yesterday,” he wrote in Wednesday's note.

He said the risk-reward balance is favorable for investors ahead of the critical Jan. 10 California Public Utilities Commission meeting that will address PG&E’s liability problems.