Cano Petroleum Enters Agreement for $25 Million Subordinated Term Credit Facility and Provides Operational Update

FORT WORTH, Texas--(BUSINESS WIRE)--Cano Petroleum, Inc (Amex: CFW) today announced that it has entered into a $25 million Subordinated Term Credit Facility with UnionBanCal Equities, Inc. (UBE). Cano will immediately draw $15 million which will be used to pay down funded debt under its Senior Secured Facility. After the payment, the Senior borrowing will be $34.5 million which is 58% of the $60 million borrowing base.

“Based upon our current information, we project that we are within 45-60 days of seeing meaningful response at our Panhandle Field waterflood and all of our major projects are progressing according to plan.”

Significant terms of the agreement include:

Maturity: 3 years with two 1-year extensions at UBE’s sole discretion

Interest rate: So long as the Debt Coverage Ratio is less than or equal to 4:00 to 1:00, LIBOR +5.75%; otherwise, LIBOR +6.00% - payable in cash quarterly in arrears. LIBOR tranche maturity to be 90 days.

Collateral: Second lien on the same assets securing the Senior Secured Facility.

Other: Includes normal representations and warranties, customary and appropriate affirmative and negative covenants along with typical ratios on EBITDA coverage to debt and interest as well as minimum asset coverage.

The Subordinated Debt Facility will provide additional funding to maintain the capital programs that are in place and discussed below.

Operations Update

Panhandle Field - Cockrell Ranch Waterflood:

To date we have injected over 4.8 million barrels of water in the Brown Dolomite formation. We currently have 65 injectors on-line with 2 more injectors being worked over which will complete our projected 67 well full-field injection contingent. We have averaged over 50,100 barrels of injection per day for the last 30 days. Additionally, all of the production facilities and associated plant construction was completed as of March 1^st.

Listed below is the Pore Volume (PV) fill-up for the respective phases of the project:

	Reservoir Pore Volume (MMBbls)	Pore Volume Injected (MMBbls)	PVI%
Phase I	13.9	1.8	12.9%
Phase II	19.6	2.7	13.8%
Phase III	14.3	0.3	2.1%
Total:	47.8	4.8	10.04%

Through the use of generally accepted engineering practices and a detailed review of successful analog waterfloods in the area, we expect meaningful oil response to occur at each Phase of the flood once we inject between 15% to 25% of the Pore Volume space of the reservoir with water. Phase I and Phase II of the project are approaching this first injection threshold level. Based on current injection rates, we have listed below the date ranges for anticipated production responses:

	Earliest Initial Response Date	Latest Initial Response Date
Phase I	Late April	Mid-June
Phase II	Mid-April	Late May
Phase III	Mid-September	December

Current production in the Cockrell Ranch Unit is averaging 50 BOEPD and 7,000 barrels of water per day, or less than a 1% oil cut, from over 27 producers where pre-response has been observed. We expect oil cuts to steadily increase to the 2% range during the initial response period and increase toward the 4% range within three to six months after initial response. Based on the calculated total fluid production rates of 15,000 to 20,000 barrels of fluid per day for both the Phase I and Phase II patterns, we expect oil production to be in the range of 150-250 BOEPD during the initial response periods and expect it to increase to over 500 BOEPD by December of 2008.

Cato Field Infill Waterflood Development Project:

We have drilled and completed sixteen (16) 20-acre infill wells at the Cato Field. As previously discussed, these infill wells’ primary purpose is to develop the 20-acre waterflood of the P-1 zone in the field. An associated benefit of this drilling is to deepen these wells by approximately 500 feet to test undeveloped lower zones of the San Andres reservoir that were not historically produced by previous operators. To date, incremental production is approximately 195 BOEPD from these wells. The last four wells completed in the P-2 thru P-5 zones have averaged 25-30 BOEPD. As we mentioned previously, these wells experience high initial decline rates and are expected to level off at about 5-7 BOEPD within the first year. Current total production at the Cato field is between 220 to 240 BOEPD.

We have just begun the process of perforating the primary P-1 zone and sand-frac stimulating the P-1 thru P-5 intervals in the majority of the wells. As previously discussed, these initial production rates were achieved after acid-frac stimulations were performed on the wells. We have performed a sand-frac stimulation on one well and have experienced significant increases in production rates compared to the acid stimulations. We are still testing the initial sand-frac well, but are encouraged by the results.

We are projected to be on pace to drill between 45 to 50 20-acre infill wells at Cato by our fiscal year-end, June 30, 2008. It is our goal to obtain the required injection permits to initiate water injection in the developed patterns shortly thereafter. We are pleased with the log and reservoir information we have observed on the P-1 primary waterflood zone as we continue to develop our infill program.

Nowata ASP Pilot:

We have had extended run-time at our ASP Pilot plant since mid-December. We are currently injecting over 700 barrels of ASP formula in our 4 injection wells. The pilot is on 2.5 acre spacing and we are anticipating increased oil cuts and meaningful response to be registered within the next 75-100 days.

Desdemona Waterflood:

At Desdemona, we have injected close to 900,000 barrels of water into the Duke Sand reservoir to date. Our pattern at Desdemona is a peripheral pattern with 6 injectors and 11 producers. We are experiencing response of 15 BOEPD and 750 barrels of fluid per day from three producing wells. We are currently still in the fill-up stage of our flood, but anticipate meaningful increases in the number of responding wells and increased oil response by July of 2008.

Management Comments

Jeff Johnson, Cano Chairman and CEO commented, “Securing this additional financing gives us additional financial flexibility and allows us to continue the execution momentum we have gained throughout this fiscal year.” Johnson adds, “Based upon our current information, we project that we are within 45-60 days of seeing meaningful response at our Panhandle Field waterflood and all of our major projects are progressing according to plan.”

ABOUT CANO PETROLEUM:

Cano Petroleum, Inc. is an independent Texas-based energy producer with properties in the midcontinent region of the United States. Led by an experienced management team, Cano’s primary focus is on increasing domestic production from proven fields using enhanced recovery methods. Cano trades on the American Stock Exchange under the ticker symbol CFW. Additional information is available at www.canopetro.com.

Safe-Harbor Statement -- Except for the historical information contained herein, the matters set forth in this news release are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that all such statements be subject to the “safe-harbor” provisions of those Acts. Many important risks, factors and conditions may cause the Company’s actual results to differ materially from those discussed in any such forward-looking statement. These risks include, but are not limited to, estimates or forecasts of reserves, estimates or forecasts of production, future commodity prices, exchange rates, interest rates, geological and political risks, drilling risks, product demand, transportation restrictions, the ability of Cano Petroleum, Inc. to obtain additional capital, and other risks and uncertainties described in the Company’s filings with the Securities and Exchange Commission. The historical results achieved by the Company are not necessarily indicative of its future prospects. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.