Citigroup Downgrades PG&E, Says Stock Price Could Hit Zero

Citigroup Downgrades PG&E, Says Stock Price Could Hit Zero
October 14, 2019


PG&E Corporation (NYSE: PCG) made headlines last week after Citigroup analyst Praful Mehta downwardly revised the stock’s rating to “Sell” from “Neutral/High Risk” on concerns over the impact of a bankruptcy plan tabled by Elliott Management group. The Citigroup analyst warned that the share price could even drop to zero in the weeks ahead. Following the release of the report, the stock lost nearly 30% last week.

PG&E’s woes began in late 2018 after its equipment failed in a series of California wildfires that led to the death of 22 people. As a consequence, the utility provider filed for bankruptcy in January, mentioning $30 billion in liabilities. Investors are still scrutinizing PG&E’s role in many more devastating wildfires in California.

Analyst Praful Mehta, in a note to clients, has stated that the bankruptcy settlement plan suggested by the bondholders headed by Elliott Management group has better chances of getting approved by the judge Dennis Montali monitoring the company’s proceedings. Mehta argues that the settlement plan proposed by the San Francisco, California-based Pacific Gas and Electric Company may have little chance of being approved as it favors shareholders. Citi has given a 90% probability for the bondholder friendly proposal, which involves a $25.50 billion payout, to get selected.

Mehta wrote, “We think the shareholders do not want to settle at these levels, given their high basis in the stock and the limits to how much financing they can raise and still have a return on investment.”

Therefore, Mehta believes that shareholders will demand claim assessment. If that takes place, according to the analyst, there is a 70% chance that the outcome will be close to $25 billion.

Earlier last week, the US Bankruptcy Court judge in San Francisco canceled PG&E’s exclusive right to suggest a Chapter 11 plan, opening the way for competing proposals from Elliott and other bondholders. Wall Street is concerned that PG&E could lose all its market value and see its stock price plunge to zero.

Additionally, last Wednesday, PG&E switched off power for roughly 800,000 customers in Northern California, primarily due to a “widespread, severe wind event.” The wind was reckoned as a potential stimulant for additional wildfires. Such developments have made Wall Street experts increasingly worried about the stock.

Based on the above developments, Mehta downwardly revised the stock’s rating while slashing price target to $5. Notably, the analyst has stated that the price target also gives a 75% chance for PG&E stock to hit zero level and 25% probability of reaching $20 a share. Mehta also expressed disbelief over the decision by the judge to terminate PG&E’s sole right to administer its own bankruptcy.

Similar to Citi analyst, Stephen Byrd, an analyst at Morgan Stanley, also anticipates the stock to hit zero levels if the bondholder plan is approved by the judge. Byrd pointed out that the creditor’s plan does not leave any equity value, implying that there is “heightened uncertainty in the process as a result.” Morgan Stanley, however, reaffirmed the “equal weight” rating for the stock while slashing price target to $16 from $23. The rating downgrade is expected to keep the stock bearish in the short-term.

Technically, the stock is trading below its 50-day moving average. Additionally, the MACD indicator has a negative reading. Considering the steep decline, there is negligible chance of recovery in the medium-term.

pge - technical analysis - 14th Oct 2019

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Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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