Cano Petroleum to Acquire Square One Energy

Cano Petroleum Inc. has entered into an $8 million contract to purchase Square One Energy, a central Texas-based oil and gas operating company, as part of the company's strategy to acquire oil reserves and significantly increase production through enhanced recovery technology.

Square One Energy's assets include a 100% working interest in 10,300 acres of mature oil fields in Erath, Comanche and Eastland counties, with current net production of approximately 70 barrels of oil per day from 34 wells at 2,600-foot depth in the Duke sand.

Cano's third-party engineers, using SEC price decks, have concluded that there are 1,065,000 barrels of proved oil reserves. Cano estimates the field contains more than 40 million barrels of probable oil reserves. The field had approximately 100 million barrels of original oil in place and, to date, has produced approximately 17 million barrels of oil in primary production.

Cano plans to apply its expertise in enhanced oil recovery methods, including waterflooding, which has not been used on the field, and evaluate whether an alkaline-surfactant-polymer (ASP) process can enhance oil recovery further.

"The Square One Energy acquisition positions Cano for growth with a significant opportunity to develop a 100-million-barrel oil field in Texas," said Jeff Johnson, chairman and chief executive officer of Cano. "The opportunity to implement the initial waterflooding and ASP technology on a property of this size exemplifies Cano's exploration philosophy to pursue mature fields. We look forward to the property's oil-producing potential and getting underway with operations."

Cano anticipates that the initial pilot waterflood operation will begin within 90 days and will focus on converting producing wells to injectors and reactivating wells. No new drilling will occur in the pilot phase. Cano expects to have results of the waterflood test within six to eight months after beginning operations.

In addition to the 70 barrels of oil equivalent per day, the lease is currently producing 400,000 cubic feet per day (400 Mcfpd).

Through the acquisition, Cano will acquire other tangible assets, including 28 acres of land, a gas processing plant, production equipment, a field office and an office building. The purchase also includes rights to explore and produce oil and gas from Barnett Shale formations on the property, which Cano does not have immediate plans to develop.

The acquisition will be funded with $4 million in cash and $4 million in stock. The stock will be restricted for 12 months, after which restrictions will be phased out at the rate of approximately 49,000 shares a month.

The Square One property was discovered in 1919 and was first unitized by Sun Exploration and Production Co. in 1986 for the purpose of waterflooding. Following a shift in oil prices, the waterflood plan was abandoned.

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