The company, which pumps nearly all of its oil in Turkmenistan, announced on Friday that it was weighing an acquisition of BowLeven, which operates in the West African countries Gabon and Cameroon.
"Dragon Oil notes the recent movement in BowLeven's share price and confirms that it is in the preliminary stages of exploring a possible offer for all of the issued and to be issued share capital of BowLeven," it wrote on Friday. Shares of Dragon, which is listed in London and Dublin, were up 3 pence after the announcement, reaching 547 pence by the close of trading on Friday.
Dragon, which is 51 per cent owned by the Dubai Government's Enoc, has been looking for places to invest a cash pile of US$1.5 billion (Dh5.5bn) since last year.
The company is evaluating opportunities in West Africa as well as north-east Africa and Central Asia, said Emad Buhulaigah, the company's general manager of petroleum development.
"We have to worry about our investors' money," he said yesterday. "We don't throw it anywhere. We have to do our due diligence before we decide." Dragon's decision has implications for the UAE. Last year, Enoc, which operates petrol stations across Dubai and the Northern Emirates but must import oil from abroad, stopped supplying fuel to stations outside Dubai.
The high price of oil coupled with federal caps that keep petrol prices artificially lowleft the company facing a Dh4.2bn fuel bill, according to Enoc.
Although some stations in Sharjah have resumed supplying motorists, Enoc is still waiting on a decision from the Government on the price caps.
BowLeven, which had a discovery in Cameroon in October, needs at least $400m to pump oil by 2015, according to Kevin Hart, its chief executive.
The company's shares have declined from a July high of 342.25 pence to 120 pence on the London exchange.
The African explorer is "undervalued by the current market price" and Dragon would be "well-positioned" to buy it, said Laura Loppacher, an analyst at Jefferies. Dragon must decide on its intentions towards the African company by March 16 to comply with UK takeover regulations.
If it does not pursue BowLeven, the Cameroon producers Kosmos and Perenco could take Dragon's place as bidders, Ms Loppacher said.
Production in both Gabon and Cameroon is declining. In Cameroon, output has fallen from 180,000 barrels per day (bpd) in the 1980s to recent levels of about 60,000 bpd.
In Gabon, where oil revenue accounts for 46 per cent of the government's budget, analysts predict that oil could run out by 2025.
Analysts say Dragon is willing to invest in assets in riskier environments.
In October, the company, which also drills in Yemen, agreed to invest up to $26.6m to develop an offshore field in Tunisia.
In the joint venture, with the Australian producers Cooper Energy and Jacka Resources, Dragon would pay 75 per cent of drilling costs in exchange for the right to take over production if the partners strike oil.