From their perspective, researchers at Deloitte see the volatility that depressed M&A markets in second-half 2008 and through 2009 spilling far into 2010, possibly washing out a revival of normalcy in upstream deal-making anytime soon.

“In more normal times, testing the bottom of the market might have generated a rash of M&A activity by now, but the global economic crisis and the 2008 U.S. national elections threw a curve ball into the mix that we believe may have caused the slump to continue,” says Gary Adams, Deloitte vice president of U.S. oil and gas, in the recent report, “Fall 2009 Oil and Gas Mergers & Acquisitions.”

Clouds of uncertainty continue to hang over the M&A markets, including limited credit availability, global economic conditions, the nature and impact of new U.S. energy regulatory and tax changes, and a lack of confidence in oil and gas commodity-price trends.

Even historically low earnings before interest, taxes, depreciation and amortization (EBITDA) multiples have not spawned increased M&A activity. “We do not anticipate a true recovery in M&A until sometime in late 2010,” the report concludes.

Not surprisingly, global M&A activity fell off in first-half 2009 by some 51% over the same period year-over-year. Global E&P deal count fell to an all-time low of 34 in first-quarter 2009, rebounding to 65 in the second quarter, and the bounce on deal value between quarters remained relatively low, up from $5 billion to just $15 billion. North American global market share dropped from 75% in fourth-quarter 2007 to 60% in first-quarter 2009, even bolstered by the $15.5-billion Suncor-PetroCanada deal. By June, activity had picked up, but only “modestly so.”

In the U.S., recent M&A deals have largely centered on onshore resource plays, driven by non-U.S. international oil companies as well as by small independent U.S.-based firms. In Canada, royalty trusts are actively acquiring conventional plays through a mix of corporate and asset deals in advance of 2011 tax changes.

Most telling, according to the report, is that U.S. super-majors have largely refrained from M&A activity over the past two years despite strong liquidity, preferring to grow organically and preserve cash. In contrast, non-U.S. super-majors are the most dominant buyers of E&P assets overseas. Resource-rich and resource-seeking national oil companies (NOCs), primarily those in Russia, India and China, were involved in six of the top 10 transactions announced through August.

“There is still a lot of uncertainty,” says Jim Dillavou, partner with Deloitte & Touche LLP, “but M&A activity should rebound as price clarity for oil and gas improves. If prices remain low, there may be significant pressure on distressed companies to sell, and deals are likely to ensue. If prices increase, a lot of deals may occur as the market turns bullish and buyers decide to make their move and the availability of capital from lenders improves.”

Dillavou believes the biggest single factor hampering M&A activity at present is credit availability. “It is difficult to obtain money to execute deals.” Potential buyers in today’s marketplace have to finance not just the deal itself, but also the balance sheet of the acquired company. An exception: companies in distress, in which lenders may be more agreeable to extending credit to help facilitate a transaction.

Additionally, the potential impact of Congress imposing new tax, regulatory and environmental stipulations on the oil and gas business makes valuations difficult, according to the report.

A “classic consolidation environment” is brewing in the E&P sector, the report forecasts. “The upturn in M&A activity within the U.S. is likely to be led by independents in the first or second half of 2010, the acquirers being companies with strong balance sheets looking to gain scale and under pressure from investors hungry for signs of new business growth in a time of diminishing earnings tied to lower commodity prices.” These independents likely will target oil-focused companies or those in financial distress, according to the report.

On a global scale, the report portends “grand shifts” involving supply, demand, infrastructure, economics and international competition creating “a perfect storm for realignment and consolidation,” and therefore greater M&A activity. “The uncertainty is not so much whether, but when the upturn would occur and how the traditional definition of M&A would evolve in light of new realities.”