Williams

(WMB) - Get Report

and

Dynegy

(DYN)

nearly doubled Monday, but the clock continues to work against the energy traders.

Investors have been increasingly pessimistic in recent months about these companies as cash grows scarce and big debt payments come due. Shares of Williams plunged 80% last week alone as rumors of a Chapter 11 filing made the rounds. Williams says it's working with its lenders, but recent events have raised questions of how long these companies can remain solvent and how steep the price of doing so might be.

Monday's action was a case in point. Dynegy's agreement to sell a gas unit to Warren Buffett's MidAmerican Energy simultaneously ignited a rally and chilled some industry observers. Sure, Dynegy raised desperately needed cash and cut debt. But some analysts, noting that there's no promise the energy traders' core businesses will improve any time soon, wonder whether the deal was worth it -- and whether Williams might soon be forced down the same path.

"Will this make Dynegy a stronger company five years from now?" asked Jake Dollarhide of Fredric E. Russell Investment Management. "I doubt it. It just bought them some time."

Resolution?

For its part, Williams is expected to resolve a looming liquidity crisis in one of two ways by Thursday. It will raise at least $800 million, through a secured bank loan or last-minute asset sales, to meet its immediate debt obligations. Or it will execute some type of bankruptcy filing to protect itself against creditors it cannot pay, observers say.

"Williams is totally asset-rich and cash-poor right now," said John Olson, an analyst at Sanders Morris Harris who doesn't own the stock. "They've gotten themselves into a proverbial deadly fork -- which, in chess, means you've got to sacrifice a piece."

Monday's rally came after federal regulators backed off athreat to revoke Williams' power rate-setting authority. It also followedWilliams' arrangement to sell its 45% stake in Williams Communications, a former subsidiary that's now bankrupt, for $225 million in cash and a $100 millionnote, and a proposed settlement with California that could pave way for along-term power contract.

Even so, by now the most hopeful scenario appears to be an option considered unthinkable just weeks ago. Williams could secure a $1 billion credit facility -- roughly half the amount it originally sought -- but only after posting valuable assets as collateral.

In Monday's trading, Williams gained 88%, or 93 cents, to close at $1.99.

Escaping

Deemed less possible is a major asset sale, like the one pulled off by Dynegy on Monday. Shares of Dynegy -- which joined Williams last week in a visit below $1 -- gained 72% to $1.20, after the company escaped its own cash crunch by selling one of its prize assets. Some observers said the deal helped energy stocks by attaching Buffett's value-seeking name to a suffering sector.

Dollarhide expressed some hope that Monday's good news would impress Williams' lenders. But he feared that public scrutiny of banking firms like

Citigroup

and

J.P. Morgan Chase

, under fire for questionable loans to

Enron

, will influence Williams' lenders more.

Peter Cohan, a longtime critic of the Williams management team,predicted bad news ahead. The Massachusetts author and investmentstrategist blasted Williams' second-quarter earnings report -- which included no guidance about the company's cash burn rate or immediate obligations -- as incomplete. And he criticized the company for postponing an earnings call that could have answered pressing investor questions.

"I can only imagine that Williams' management figured that the dangers of doing the call this morning, as scheduled, were greater than the confusion and concern resulting from the delay," said Cohan, who has no financial stake in the company. "It is hard to break an old habit of putting out misleading and confusing information as a way of stalling for time."

Preservation

Some observers even began searching for a silver lining in a possible bankruptcy. Their thoughts: By limiting any Chapter 11 filing to the company's trading arm -- the source of its huge second-quarter loss and ongoing market punishment -- Williams could preserve its valuable pipeline and energy businesses while protecting shareholders from a total wipeout.

Olson pointed to

PG&E

(PCG) - Get Report

, which bankrupted its utility division during the California energy crisis, as a model Williams could follow.

PG&E has at least managed to preserve some shareholder wealth. Following a 2001 bankruptcy that excluded its unregulated pipelines, the company saw its stock price immediately dive from $11 to $6.50. The stock has since traded above $23, although it recently has slid backward to about $12 a share. Common shareholders' stakes are typically wiped out when an entire company files for Chapter 11.

Williams didn't respond to questions about a possible partial bankruptcy. But Olson said he thought that could be a solution for the company.

"I don't necessarily think they would have to file for full bankruptcy companywide," Olson said. "This could become a very interesting recovery."