Cano Petroleum Announces CapEx Budget

Cano Petroleum, Inc. (AMEX:CFW - News) announced today its operations and capital expenditure update. Cano's current net daily production is approximately 1,200 boepd.

Cano's CapEx budget for the next 12 months is approximately $15,600,000 and is anticipated to generate incremental production of 600 to 700 boepd. Over the next 12 to 18 months, current proved reserves of 40,131 Mboe are expected to increase by approximately 10,900 Mboe due to converting probable into proved reserves. Included in that increase are approximately 6,173 Mboe of probables at Desdemona that are expected to be proved with a waterflood pilot and approximately 4,701 Mboe of probables at Nowata that are expected to be proved with a surfactant-polymer (SP) flood pilot.

Operations and anticipated CapEx by asset:
Panhandle Field, Hutchison, Carson and Gray Counties, Texas -- generated approximately 38% of Cano's second fiscal quarter 2006 production (acquisition closed 11/29/05; December production only -- 720 boepd) and represents approximately 82% of the Company's proved reserves. Cano's working interest in the field is 100%.

Cano's leasehold position at Panhandle is 27,000 acres. The Company has budgeted $2 million to the field to workover existing wells and initiate Phase I of a waterflood program.

Since acquiring Panhandle at the end of November, Cano has stimulated three wells -- re-fracturing them to improve production. In all three cases, production increased approximately 700%, from approximately 1 boepd to 7 to 9 boepd. The company has identified a number of additional wells it believes can benefit from this treatment and will continue to evaluate others. Current net production is approximately 750 boepd.

Execution of Phase I of the Panhandle waterflood and injection activities is anticipated to commence within 60 to 90 days. Panhandle has 29,400,000 boe of proved-undeveloped reserves that the company believes can be recovered through waterflood.

Nowata Field, Nowata County, Oklahoma -- generated approximately 34% of Cano's second fiscal quarter 2006 production (203 boepd) and represents approximately 4% of the Company's proved reserves. Cano's working interest in the field is 100%.

Cano's leasehold position at Nowata is 2,601 acres. The Company has budgeted $4 million to the field to implement a surfactant-polymer (SP) flood pilot program.

Current net daily production at the Nowata field is approximately 200 boe.

Cano has received positive results from its laboratory testing of Nowata core samples and is moving forward with the implementation of a SP-enhanced waterflood pilot. The pilot area has been isolated, tracer surveys are being conducted to identify reservoir characteristics and mixing and injection facilities are being developed. The project is on track with earlier estimates calling for SP injection to commence in the summer of 2006. The SP pilot is anticipated to prove approximately 4,701 MMboe of probable reserves.

Davenport Unit, Lincoln County, Oklahoma -- generated approximately 7% of Cano's second fiscal quarter 2006 production (41 boepd) and represents approximately 1% of the Company's proved reserves. Cano's working interest in the field is 100%.

Cano's current leasehold position at Davenport is 2,178 acres. The Company has budgeted $1.4 million for the Unit for returning idle wells to production, upgrading production facilities, upsizing downhole equipment and preparing for a surfactant-polymer SP-enhanced waterflood pilot.

To date, six additional wells have been brought back into production, resulting in current net production from the field of approximately 50 boepd, and an additional three wells have initially been identified for workover.

Initial Davenport surfactant-polymer (SP) laboratory testing has been positive. Additional testing is underway and results will be released when received by Cano. Engineering has identified a pilot testing area which has been isolated and in which tracer surveys and fall off tests are currently underway. The SP pilot is anticipated to prove approximately 10,527 barrels of probable reserves that Cano believes can be recovered through an SP-enhanced waterflood.

Desdemona Field, Erath, Eastland and Comanche Counties, Texas -- generated approximately 5% of Cano's second fiscal quarter 2006 production (30 boepd) and represents approximately 4% of the Company's proved reserves. Cano's working interest in the field is 100%.

Cano's current leasehold position at Desdemona is approximately 10,319 acres. The Company has allocated $3.7 million to the field in calendar 2006 for returning idle wells to production and the installation of facilities for the waterflood.

Cano now has 61 wells online at Desdemona and recently increased current net daily production by 70%, from 30 boe to 50 boe. The Company anticipates an additional 25 wells will be brought online in calendar 2006, resulting in incremental production of approximately 100 boepd, including associated gas.

Pilot waterflood operations are underway and the Company is moving forward with installation of facilities needed for expansion of the waterflood. 800 bpd of water is currently being injected; this is expected to reach 10,000 bpd over the next 12 months. Cano is permitting additional waterflood injection wells and evaluating fresh water sources for future ASP flooding plans. Cano believes an estimated 6,173 barrels of probable reserves can be proved up with a successful waterflood pilot, with an additional 18,194 barrels of probables proved up later through SP-enhanced flooding.

Putnam Unit
Cano has secured leases of current interest totaling approximately 600 acres. Putnam is part of a larger field at an undisclosed location that was the subject of a successful polymer flood pilot in 1983. Putnam represents approximately 5% of the Company's proved reserves.

$800,000 of Cano's 2006 CapEx budget has been allocated to Putnam, in which Cano owns a 100% working interest. Safety, Health and Environment (SHE) upgrades are being implemented and production operations are to be commenced in the near future, returning idle wells to production. The first well is expected to be online in 30 to 60 days. Cano is evaluating an alkaline-surfactant-polymer (ASP) flood and will obtain a core sample to begin ASP testing in the laboratory.

Rich Valley, Grant County, Oklahoma -- generated approximately 16% of Cano's second fiscal quarter 2006 production (97 boepd) and represents approximately 4% of the Company's proved reserves. Cano's working interest in the field is 82%.

Cano's current leasehold position at Rich Valley is 4,500 acres. The Company has budgeted $3.7 million for Rich Valley in order to reenter a vertical well and extend laterally a horizontal leg up to 3,000 feet in order to improve gas production. Two infill wells are also planned.

Cano recently completed the workover and upsizing of two wells, increasing Rich Valley's net daily production to its current level of 150 boepd, comprised of 65% gas, 35% oil.

Jeff Johnson, Cano's Chairman and CEO, stated: "We are very pleased with the progress we have made in executing our strategy to increase production from our assets. Field-level improvements, such as workovers, stimulations and other activities, are beginning to make significant increases in daily production and we are right on track with our plans to execute waterflood and EOR pilots at Desdemona, Davenport and Nowata. We are looking forward to an exciting and productive 2006."

About Cano Petroleum
Cano Petroleum Inc. is an independent Texas-based energy producer with properties in the mid-continent region of the United States. Led by an experienced management team, Cano's primary focus is on increasing domestic production from proven onshore fields using secondary and enhanced recovery methods. Cano trades on the American Stock Exchange under the ticker symbol CFW.
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