Cano's FY 2008 Q2 Results Yield Loss

Cano Petroleum, Inc. reported its financial results for its fiscal year second quarter ended December 31, 2007. Following are selected financial highlights from the Company's 10-Q.

For the quarter ended December 31, 2007 ("current quarter"), Cano's revenues were $10.0 million, which is $3.9 million, or 63%, higher than the same period last year. For the current quarter, the Company recorded a net loss applicable to common stock of $1.6 million, or $0.04 per share, as compared to a net loss of $1.4 million, or $0.04 per share, for the quarter ended December 31, 2006 ("prior year quarter"). For the current quarter, income from operations of $1.1 million compares with a loss of $0.4 million for the prior year quarter. The current quarter was adversely impacted by a $1.8 million unrealized loss on commodity derivatives recorded in other income (expenses).

The $3.9 million revenue increase was driven by both higher prices, which contributed $3.1 million and higher volumes which contributed $0.8 million. For the current quarter, Cano's sales were 67 MBbls of oil and 365 MMcf of natural gas, or 128 MBOE, an 11% increase when compared to the prior year quarter. During the current quarter, the average prices the Company received for its oil and natural gas sales were $87.06 per barrel of oil and $11.15 per Mcf of gas, respectively. For the prior year quarter, oil sales were 64 MBbls at an average price of $58.40 per barrel and natural gas sales were 308 MMcf at an average price of $7.84 per Mcf. The increased oil sales are primarily attributed to the New Mexico Properties (Cato) which were acquired in March 2007; the increased natural gas sales are primarily attributed to Barnett Shale production in our Desdemona properties. Cano's production was adversely effected by freezing weather in December 2007. The Panhandle and Pantwist properties were shut-in for five days and the Davenport and Nowata properties were shut in for 10 days. This is further discussed below under "Operations Update" section.

During the current quarter, our total operating expenses were $8.9 million or $2.3 million higher than the same period last year. The increase is primarily attributed to higher general and administrative expenses ("G&A") of $1.1 million, increased lease operating expense ("LOE") of $0.9, higher production and ad valorem taxes of $0.2 million, and depletion and depreciation expense of $0.1 million.

The primary reasons for increased G&A expense was the $0.9 million increase in non-cash stock based compensation expense and higher legal expense pertaining to the fire litigation. For the current quarter, the LOE per barrel equivalent was $24.72 as compared to $19.62 for the prior year quarter. The increased LOE is attributed to the weather related outages and non-recurring operating expense in the Desdemona Properties. We expect the per barrel cost to decrease during this fiscal year as production increases from our development activities.

Other expenses for the quarter totaled $2.1 million compared with a $0.5 million in the same quarter last year. The major contributing factor was the $1.8 million recorded in unrealized loss on commodity derivatives. This charge reflects the mark-to-market valuation of the derivative contracts Cano has in place. We have attached a schedule of all of the derivative contracts currently in place.

On November 7, Cano closed a private placement of 3.5 million shares of common stock. The net proceeds of $23.4 million will primarily be used to fund our capital investing for the balance of the fiscal year. At December 31, 2007 our outstanding debt balance was $42.0 million. The Series D convertible preferred stock was reduced by voluntary conversion of four thousand shares plus accrued dividends. The conversions resulted in our temporary equity being reduced to $44.6 million at December 31, 2007.

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