Cano Petroleum's Production In Line with Guidance

Cano Petroleum announced that production was in line with guidance for the first quarter which averaged 1,218 BOEPD, down 6.9% from the fourth quarter of FY 2009 and down 1.7% from the prior year first quarter. Production was down, temporarily: (i) at the Cockrell Ranch waterflood (25 BOEPD) due to our Controlled Injection Project surveillance, (ii) at the Panhandle Properties as one of our gas purchasers experienced an unplanned plant outage that started in mid-August 2009 and lasted thru late September 2009 (15 BOEPD for the quarter) and (iii) at the Cato Properties as a result of re-allocating injection to expand the waterflood footprint (30 BOEPD) and the creation of new injection points (June 2009 through early 2010). Additionally, production at the Desdemona Properties was down approximately 20 BOEPD due to the shutting-in of our Barnett Shale production in July 2009.

For the quarter ended September 30, 2009, we incurred a loss applicable to common stock of $4.0 million, which was a $15.8 million decrease as compared to the $11.8 million income applicable to common stock incurred for the quarter ended September 30, 2008. Items contributing to the $15.8 million earnings decrease were a lower gain on derivatives of $24.2 million and lower operating revenues of $5.7 million. Partially offsetting the decrease were lower operating expense of $2.5 million, a reduced loss on discontinued operations of $0.9 million and lower preferred stock dividends of $0.5 million.

Operations Update

In the first quarter we spent approximately $5.1 million of our $13.9 million FY 2010 development capital budget. The break-out for expenditures is as follows:

  • Panhandle Field: $3.0 million to maintain the Controlled Injection Project
  • Cato Field: $2.1 million to convert three wells to injection and expand the waterflood footprint

Cato Properties -- Cato Field: Since the water injection permits were received in September 2008, we have steadily increased fluid injection from 7,000 barrels of water per day (BWIPD) to over 12,000 BWIPD. Our new injection water source came on-line during September 2009. Subsequently, the exit injection rate for the quarter was 16,000 BWIPD. Corresponding waterflood production has also increased from five infill producers, offsetting prior Amoco pilot injection wells (December 2008), to 29 producers realizing production response (June 2009).

In the second calendar quarter of 2009, we completed injection plant capacity improvements and now have ten submersible-pumps operating. More submersible-pumps are planned to be installed as a result of increasing production response and correspondingly higher fluid levels. Our 2010 Fiscal Year capital development plan includes adding three new injection wells and enlarging the waterflood footprint to approximately 1,000 acres (currently at 640 acres). As of today, we have added three new injection wells and we are working on a fourth new injector conversion. We are on target to add 4,000 to 6,000 BWIPD to achieve total injection of 21,000 BWIPD by the end of the fiscal year.
Cato production will continue to be flat until we achieve pore volume fill-up in the new waterflood pattern acreage. Fill-up is anticipated to occur early in the 2010 calendar year. Net production at Cato averaged 302 BOEPD in September.

Panhandle Properties: During the quarter ended June 30, 2009, we averaged roughly 75,000 BWIPD at the Cockrell Ranch. This resulted in increasing our average daily production at the Cockrell Ranch Unit to 120 net BOEPD from approximately 80-100 net BOEPD (between June and December 2008). While crude oil production continued to increase at the Cockrell Ranch, the gains were below our expectations.

We have retained an independent third party engineering firm to assist us with a reservoir analysis and simulation modeling at the Cockrell Ranch to ascertain how we can optimize production in this field. Based on recommendations from the independent third party engineering firm, we established a Controlled Injection Pattern to gauge the effects of optimizing water injection into the highest remaining crude oil saturation intervals of the Brown Dolomite formation (a “Mini-Flood” in the key target interval at the Cockrell Ranch). We expect the results of this field observation, coupled with rigorous reservoir simulation modeling, to show us how to move the project forward with a more predicable production profile. Moreover, we expect the field observation and modeling results to improve the planning of future development programs for the remaining Panhandle Properties.

All production that was shut-in for the Controlled Injection Project (25 BOEPD) was restored on September 28, 2009. The results of the Controlled Injection Project and the accompanying independent third party engineering firm reservoir simulation is expected to be completed in the first quarter of calendar year 2010. Additionally, an unplanned gas plant outage for one of our purchasers (Eagle Rock) was remedied at the end of September 2009 and full gas sales were restored for the month of October 2009.

We previously announced that we have executed a new gas purchase contract for the Panhandle Properties to move most of our gas volumes to DCP Midstream. As of September 30, 2009, we have successfully moved 45% of the gas volumes to DCP and anticipate moving the majority of the remaining gas to DCP by December 31, 2009.

Net production at the Panhandle Properties for September 2009 was 588 BOEPD.

Desdemona Properties: As previously mentioned, in July 2009 we shut-in our Barnett Shale natural gas wells. We are starting a project to return previously shut-in Duke Sand gas wells to production. The Duke Sand wells are currently classified as Proved Developed Non-Producing. We hope to have approximately 25 of these wells on line and producing by the end of December 2009. Rates from these wells are expected to be in the 10 MCFPD range per well, plus associated natural gas liquids recovery from our gas plant.

Net production at the Desdemona Properties for September 2009 was 30 BOEPD.

Nowata Properties: Our ASP tertiary recovery pilot project has been in full operation since December 2007. Preliminary results have yielded a two-to-three-fold increase in producing oil-cut in our pilot observation area. We are testing fluid properties from the entire pilot to gauge the effectiveness of the ASP recipe. We anticipate completing the full ASP pilot performance analysis within the next three months. We have no proved reserves associated with the ASP pilot. Net production at the Nowata Properties for September 2009 was 216 BOEPD.

Guidance for the Second Quarter

Lease Operating Expense, on a production basis, averaged $38.73/BOE for the first quarter of fiscal year 2010, down 15% from the first quarter of fiscal year 2009 and down 3% from the fourth quarter 2009. We have been aggressively cutting LOE through further re-negotiation of our pulling unit contract at the Panhandle and Cato fields and managing injection/ withdrawal rates at both of our key waterfloods to reduce uneconomic production. These actions, and others, should reduce LOE to approximately $36.00/BOE in the second quarter. We would expect these measures to reduce our LOE towards $30/BOE in the second half of the year. We forecast production to remain flat in the second quarter, as compared the first quarter, as we will spend only maintenance capital going forward until the merger closes.

Merger Update

On Friday, October 23, 2009, Resaca filed a Form S-4 with the Securities and Exchange Commission. Once approved by the SEC, the Form S-4 will serve as a prospectus for Resaca shareholders as well as a joint proxy statement for both Resaca shareholders and Cano stockholders to vote on the proposed merger of the two companies, in addition to other matters to be voted on as discussed therein.

Related Companies
 Company: Cano Petroleummore info
 - Cano CFO to Resign (Jun 17)
 - Cano Waves Goodbye to CEO (Feb 14)
 - Cano Terminates Merger Agreements with Resaca (Jul 22)

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