EnCap, Earthstone Sued Over $860 Million Bighorn Permian Deal

An Earthstone Energy Inc. investor filed suit in Delaware, challenging a $280 million financing transaction with its largest stockholder, EnCap Investments LP, as part of Earthstone’s $860 million deal for Bighorn Permian LLC.

The shareholder derivative lawsuit, made public Monday, targets EnCap and members of Earthstone’s board, including several with ties to the private equity firm, which allegedly controls the energy company through its 49% stake and five appointees to the 10-seat board.

The heavily redacted suit accuses EnCap and its affiliates of pushing Earthstone into a heavily discounted and “suspicious” financing deal—a private investment in public equity also involving Post Oak Energy Capital LP—without putting in place meaningful protections for minority investors.

It’s “reasonably conceivable that defendants steered Earthstone away from cheaper options to finance the transaction,” the suit says.

Representatives for EnCap and Earthstone didn’t immediately respond to requests for comment Tuesday. Post Oak isn’t named as a defendant. The Bighorn acquisition closed in April.

According to the complaint in Delaware’s Chancery Court, so-called PIPE transactions are widely considered a relatively expensive form of financing that should only be undertaken as a last resort. Those circumstances call for heightened judicial scrutiny, the suit says. It was originally filed under seal Sept. 7.

The allegations echo an earlier action by the same investor seeking internal documents from Earthstone under a Delaware law giving corporate shareholders broad inspection rights if they credibly suspect self-dealing or fiduciary breaches.

Cause of Action: Breach of fiduciary duty; aiding and abetting.

Relief: Damages, costs, fees, and interest.

Attorneys: The investor is represented by Block & Leviton LLP.

The case is Assad v. EnCap Investments LP, Del. Ch., No. 2022-0786, complaint unsealed 9/12/22.