Cano Petroleum Reports Loss for 3Q06

Cano Petroleum, Inc. (Amex: CFW) announced its financial results for the third quarter ended March 31, 2006. Following are selected financial highlights from the Company's 10-QSB:

Third Quarter Results

For the three months ended March 31, 2006, Cano reported a net loss of $1.131 million, or $.05 per diluted share, on revenues of $5.423 million. The net loss included a loss on derivative hedging instruments of $1.275 million. For the three months ended March 31, 2005, Cano recorded a net loss of $775 thousand, or $.07 per diluted share, on revenues of $1.462 million.

For the three months ended March 31, 2006, Cano's sales were 57 MBbls of oil and 229 MMcf of natural gas, or 96 MBOE, a 210% increase when compared to the quarter ended March 31, 2005. During the current reporting period, the average prices the Company received for its oil and natural gas were $61.95 per barrel and $8.08 per Mcf, or $56.49 per BOE. For the same period ending March 31, 2005, oil sales were 24 MBbls at an average price of $49.39 per barrel and natural gas sales were 41 MMcf at an average price of $5.60 per Mcf, or 31 MBOE at an average price of $47.16 per BOE.

Operating revenue for the three-month period ended March 31, 2006, was $5.423 million, up 71% compared to $3.163 million for the prior three-month period ended December 31, 2005. Operating income for the three-month period ended March 31, 2005, was $368 thousand, compared to an operating loss of $407 thousand for the previous quarter. The increase was primarily related to increased production volumes due to receiving three full months of production from the Panhandle acquisition and increased oil and gas prices.

Nine months Results

For the nine months ended March 31, 2006, Cano reported a net loss of $3.076 million, or $.14 per diluted share. Included in the net loss was $497 thousand of operating loss, as well as the loss on hedging contracts of $2.910 million. For the nine months ended March 31, 2005, Cano recorded a net loss of $2.150 million, or $.24 per diluted share, which included $2.160 million of operating loss.

For the nine months ended March 31, 2006, Cano's sales were 120 MBbls of oil and 394 MMcf of natural gas, or 186 MBOE, a 121% increase when compared to the nine months ended March 31, 2005. During the current nine month reporting period, the average prices the Company received for its oil and natural gas were $60.69 per barrel and $8.14 per Mcf, or $56.62 per BOE. For the same period ending March 31, 2005, oil sales were 62 MBbls at an average price of $47.78 per barrel and natural gas sales were 133 MMcf at an average price of $5.94 per Mcf, or 84 MBOE at an average price of $45.00 per BOE.

Operating revenue for the nine-month period ended March 31, 2006, was $10.532 million, up 179% compared to $3.780 million for the nine-month period ended March 31, 2005. The increase was primarily related to increased production volumes due to the Panhandle acquisition and increased oil and gas prices.

Balance Sheet Review

At March 31, 2006, current assets were $5.033 million, which included $1.319 million of cash. Current liabilities were $1.548 million and long-term debt was $42.750 million. The Company's credit facilities as of March 31, 2006 had $2 million available. As of March 31, 2006, the Company's net capitalized costs associated with its oil and gas properties and other equipment were $106.487 million. Its stockholders' equity was $39.482 million.

Hedging Activities

Pursuant to Cano's senior and subordinated credit agreements, the Company was required to enter into financial contracts in second quarter of Fiscal 2006 to hedge its exposure to commodity price risk associated with expected oil and gas production. For calendar years 2006, 2007, and 2008, the hedged production amounts, as expressed in barrels of oil equivalent per day, are 832, 781, and 735, respectively. Cano entered into financial contracts to set the following price floors for calendar years 2006 through 2008:

  • Crude oil production of $60/barrel for 2006, and $55/barrel for 2007 and 2008.
  • Natural gas production of $8.50/mcf, $8.00/mcf, and $7.50/mcf for 2006, 2007, and 2008, respectively.

The Company has no derivative hedging contracts that set a price ceiling. Therefore, it is entitled to 100% of its revenue receipts and, if crude oil and natural gas NYMEX prices are lower than the price floor, it will be reimbursed for the difference between the NYMEX price and floor price.

During the three- and nine-month periods ended March 31, 2006, there were settlements under our derivative agreements due to Cano amounting to $140,996, which is included in our Consolidated Statements of Operations under "Crude Oil and natural gas sales." The settlements were cumulative monthly payments due to Cano since the NYMEX gas price was lower than the $8.50 "floor gas price." The cash flows relating to the derivative instruments are reflected in operating activities on our statements of cash flow.

Management Comments

Jeff Johnson, Cano's Chairman and CEO, stated, "We are very pleased with the company's progress over the last quarter. We turned a significant corner during the quarter, producing net operating income for the first time. We anticipate that this trend will continue, barring a substantial decrease in commodity prices."

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