LONDON (Bloomberg) -- Emirates National Oil Co., the Dubai state-controlled energy company that’s the largest investor in Dragon Oil Plc, said it may make an offer for the remaining stock after holding talks with the London-listed explorer.

Emirates National “is contemplating making an offer to acquire all of the outstanding shares of Dragon,” it said on Saturday in a statement. A bid would be at “a modest premium” to Dragon’s closing share price on June 3, the company said.
Dragon, a Dubai-based explorer operating in Turkmenistan, closed at 338 pence a share that day, valuing the company at 1.73 billion pounds ($2.78 billion). It jumped 19 percent on Friday after saying it received a bid approach.
Oil producers are studying acquisitions as falling crude prices and lower equity values make assets affordable. Heritage Oil Ltd., a U.K. explorer operating in Uganda and Iraq, said June 3 it’s in preliminary discussions that may lead to a merger, while Britain’s Premier Oil Plc bought Oilexco North Sea Ltd. for $505 million in May.
“We see Dragon Oil as an excellent acquisition target due to its strong fundamentals,” Pavel Sorokin, a Moscow-based analyst at UniCredit, said on Saturday in a note. “Dragon Oil has production growth potential of around 15 percent year on year, major untapped gas reserves that Turkmenistan is keen on developing, and an excellent management team.”
---------Production gains
Dragon increased first-quarter output 19 percent to an average of 43,787 barrels a day after bringing new wells on stream, the company said in April. The explorer plans to drill as many as 35 development wells through 2011.
Dragon fell 6.8 percent to 375 pence on Saturday, the biggest decline in three months, valuing the company at 1.92 billion pounds.
The explorer, 52 percent-controlled by Emirates National, has been subject to takeover speculation in the past. Russia’s OAO Lukoil unsuccessfully sought to buy control of the company in 2005, while Royal Dutch Shell Plc, BP Plc and PT Medco Energi Corp. were cited as potential investors in 1997, according to newspapers Bisnis Indonesia and the U.K. Daily Telegraph.
Chief Executive Officer Abdul-Jaleel Al-Khalifa said in March that Dragon itself is studying purchases of assets and businesses to expand further in Central Asia, the Middle East, North Africa and the North Sea. The explorer said at the time it plans to set up Dragon Oil Ltd. in Bermuda as a holding company, cutting tax on acquisitions.
---------------Profit increase
Dragon invested about $81 million in drilling and infrastructure development in the first quarter and had $833 million in cash with no debt as of March 31. It posted a 21 percent increase in earnings last year to $369 million on higher output, while sales advanced 18 percent to $706.1 million.
The company plans capital expenditure on infrastructure of $700 million to $800 million through 2011, including $300 million this year, which doesn’t include drilling. As much as $600 million is earmarked for infrastructure development and drilling in 2009, the company said earlier in the year.
Emirates’ talks with Dragon follow discussions between Heritage Oil and potential partners. St. Helier, Jersey-based Heritage said June 3 that any merger would be “treated as a reverse takeover” under U.K. listing rules. The deal would involve the “acquisition by Heritage of a company that is not subject to the City Code on Takeovers and Mergers,” a reference to companies listed in the U.K., Channel Islands or Isle of Man.