Cano Issues Ops Update

Cano Petroleum, Inc. on Tuesday provided the following update of its production and operations and reported that drilling and capital expenditures under its FY 2007 Capital Budget are on schedule.

Operational Update

Thru May 2007, Cano has spent roughly $46 MM out of its approved $51 MM FY 2007 Capital Budget. Cano announced the closing of the sale of the Rich Valley Field on June 12, 2007 for $7.0 million. The effective date of the sale was April 1, 2007. The resulting production from this sale averaged 110 BOEPD for April. Additionally, as previously announced, Cano has spent $9.5 MM for the acquisition of the Cato Field assets in New Mexico.

Development Update

Panhandle Field:

Our Phase I development pattern is complete and all wells are ready for waterflood operations to commence. We have two drilling rigs running and have drilled and completed 36 Waterflood replacement wells to date. All of the remaining injection well conversions will be complete by the end of the second calendar quarter of 2007. Our Phase I waterflood facility construction and pipeline installation is over 90% complete. We will initiate our water injection in Phase I at the Cockrell Ranch the last week in June. Initial injection rates into the 25 Phase I pattern injectors will be roughly 18,000 barrels of water per day. We expect to initiate Phase II and Phase III water injection in the Cockrell Ranch Unit by August 1, 2007. Initial response from Phase I of the waterflood is anticipated by December of 2007.

Desdemona Field Barnett Shale:

We have drilled 15 vertical wells, and 4 horizontal wells to delineate the lateral extent of the Barnett Shale formation within the roughly 11,000 acres of our Desdemona Field. Currently, 15 vertical Barnett Shale wells are on production, averaging a gross 0.9 MMCFPD of total gas production. The results of the vertical well test program have provided encouraging results that have allowed us to initiate our Horizontal Well Development Program in the field. We have drilled, completed and fracture stimulated four horizontal wells, drilled with 2,500 foot lateral sections. All four horizontal wells have experienced at least P-95 stabilized flow rates of 350 MCFPD, with the best well, the E-26, yielding stabilized gross flow rates in excess of 1.5 MMCFD.

Based on our initial horizontal test results, it is internally estimated Cano has between 80 to 100 total horizontal locations on roughly 100 acre spacing. We expect initial production rates of between 350 MCFPD (0.5 BCFE EUR) and 650 MCFPD (0.8 BCFE EUR) from each horizontal well. Horizontal drilling and completion costs are estimated at roughly $875M per well, compared to the vertical well drilling and completion cost of $523M per well. Based on the recovery ranges mentioned, internal estimates of proved undeveloped reserves are between 40 BCFE (7 MMBOE) to 80 BCFE (13 MMBOE) for the Barnett Shale in this field. Economics from these recovery ranges indicate return on investment ("ROI") range of 40% to 75% at a $7/MCF gas price and a return on investment ("ROI") range of 15% to 34% at a $5/MCF price. We anticipate maintaining a one rig horizontal drilling program in this field to develop the play. As previously mentioned, we also have Marble Falls formation re-completion potential in all of the vertical and horizontal Barnett Shale wells we complete. Based on the three existing Marble Falls re-completions producing in the field, we internally estimate a net recovery of 0.2 BCFE (0.033 MMBOE) per re-completion. Assuming a total of 95 Marble Falls re-completions in the field, this could add an additional internally generated EUR of between 15 BCFE (2.5 MMBOE) to 19 BCFE (3.2 MMBOE) of reserves in the field. The economics for these re-completions (which cost an estimated $100M per well) result in an internally estimated ROI range of 31% for a $5/MCF gas price to 57% for a $7/MCF price.


Cano has drilled and completed all 16 pattern replacement wells and plans to reinstate a prior Waterflood in this field. Production in the field was resumed in April and we have returned six new producing wells to production and have averaged a preliminary 1% oil cut in advance of re-initiation of the prior waterflood. We are currently in the permitting phase and expect to receive final approvals to inject water in third calendar quarter of 2007. As we previously mentioned, we have been pleased with the remaining oil saturations in this field and coupled with the prior successful Polymer pilot in this field in the 1980's, the company feels strongly that this field is a prime ASP candidate. Once the waterflood response and laboratory results are analyzed, we anticipate evaluating an ASP Pilot in the field in 2008.

Desdemona Field Waterflood:

We drilled and completed all of the 11 required waterflood replacement wells to initiate the development of the Duke Sand Waterflood at Desdemona. Procurement and infrastructure development is complete on this project. We encountered a delay in the waterflood permitting application with the Texas Railroad Commission. A hearing is scheduled for late July, and we expect regulatory approvals to initiate water injection in the fourth calendar quarter of 2007. Initial waterflood response is expected in the second calendar quarter of 2008.

Nowata Field:

We completed the budgeted workovers to return 15 wells to production in the Nowata field to optimize the existing Waterflood pattern. The ASP Pilot plant construction is firmly on schedule with delivery and field testing set for June, 2007. The company has completed sourced surfactants, polymers and equipment for a scheduled July, 2007 start-up of the ASP Pilot. Response is anticipated in the second calendar quarter of 2008.

Davenport Field:

We completed workovers to return 12 producers to production and are awaiting final regulatory approval to activate 11 injection wells to optimize the existing Waterflood pattern at the Davenport Field. Initial results of the wells returned to production have been encouraging and production increases have exceeded expectations. Contingent upon successful laboratory studies, we anticipate initiating an ASP Pilot project in the FY 2008 timeframe.

Cato Field Acquisition:

As reported in our Press Release on April 2nd, Cano acquired roughly 20,000 acres and three fields in Chavez and Roosevelt Counties New Mexico. The prime asset is the roughly 15,000 acre Cato Field, which produces from the historically prolific San Andres formation. This formation has been successfully waterflooded in the Permian Basin for over 30 years. Cato is the largest San Andres field in the Permian Basin that has never been flooded. The primary reason for no flooding to date was due to multiple major oil company operators that could not agree on unitization. This field was eventually unitized by Kelt Oil in 1990 and secondary recovery permits are in place. Moreover, this field is a very viable CO-2 Tertiary flood candidate with a CO-2 pipeline 4 miles from the site. This field contained roughly 100 MMBOE of original oil in place ("OOIP"), based upon previous third-party engineering and geologic studies. Primary production to date is roughly 16 MMBOE or 16%. The mean recovery estimated in a report by Texas A&M University when it studied over 40 San Andres waterflood recoveries in the Permian Basin, is 38% of OOIP. The study indicated potential probable and possible reserves waterflood recovery is 42% of OOIP with an additional 8-10% of OOIP for tertiary possible reserves recovery via CO-2. This puts the estimated unrisked net incremental recovery for this field at 35 MMBOE.

We currently have two workover rigs in the field and expect to return-to-production between 5-7 idle wells per month. Moreover, we are in the process of procuring a drilling rig to initiate infill drilling of the waterflood pattern replacement wells in August. Initiation of Phase I of the waterflood at Cato is scheduled for second calendar quarter, 2008.

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 fields using enhanced recovery methods.

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