Cano Petroleum Closes $55 Million Acquisition of WO Energy

Cano Petroleum has closed the acquisition of WO Energy of Pampa, Texas ("WO") for $55,240,000. After the acquisition, and based on Cano's year-end SEC pricing of $56.54 oil and $6.80 gas, the PV10 valuation of Cano's proved reserves increased from $59,551,000 to $347,358,000. As a result of the acquisition, Cano's proved reserves grew from 5,523,000 boe to 40,020,000 boe. Based on approximately 26.9 million shares outstanding, the acquisition results in a PV10 value of proved reserves (net of debt) of $11.24 per share.

The company's daily production will increase from approximately 400 boepd to around 1,200 boepd. With this acquisition, Cano's operating revenues, net of lease operating expenses, production taxes and debt service, are expected to increase to approximately $800,000 per month.

The $55,240,000 paid for WO was structured as follows: $2,000,000 cash, $8,240,000 in restricted Cano shares, $30,000,000 senior debt financing and $15,000,000 subordinated debt. The 1,791,320 restricted shares issued in the transaction were issued at market and are restricted under Rule 144 for one year, subject to additional selling conditions beyond that. The purchase price was allocated $5,240,000 to inventory and equipment, with the balance of $50,000,000 to the underlying oil and gas assets, resulting in Cano paying approximately $1.45 per proved boe - a figure that is comparable to Cano's previous acquisitions, but is significantly lower than recently reported acquisitions in the industry.

WO's assets are located in the Panhandle Field consisting of 480 producing wells, 40 water disposal wells and 380 idle wells on approximately 20,000 acres in Carson, Gray and Hutchinson counties located in the Texas panhandle, approximately 45 miles north of Amarillo. The acquisition includes 10 workover rigs, company vehicles, compressors and associated equipment. The field currently produces about 800 net boepd to WO, comprised of 55% oil (40 gravity) and 45% gas (2,000 MMBTU) from the Brown Dolomite and Granite Wash formations at a depth of about 4,000 feet. Lease operating expenses are approximately $14 per boe.

Cano estimates that the WO assets contained over 600,000,000 boe of original oil in place (OOIP) and to date have produced approximately 90,000,000 boe through primary production. Forrest Garb & Associates' (Cano's independent engineer) engineering report estimates the WO assets contain approximately 34,497,000 boe of proved reserves comprised of 5,100,000 boe of proved-producing reserves and 29,397,000 boe of proved-undeveloped reserves that can be recovered through waterflooding, given the results of four analog fields in the same formation. Forrest Garb estimates the PV10 of WO's proved reserves to be $287,807,000. Cano estimates there could be up to an additional 63,000,000 boe of probable/possible reserves that can be produced with improved recovery rates and EOR methods such as CO2-flooding, bringing the estimated total of all WO reserves - proved and probable/possible - to 97,497,000 boe.

Cano is evaluating a capital expenditure strategy for the WO assets similar to the previously announced asset development plan for its other fields. The plan will be designed to increase current production, ahead of the anticipated future increases due to waterflooding or EOR.

The financing facility is comprised of senior and subordinated debt. The senior debt, issued by Union Bank of California (UBOC), is a $100,000,000 credit facility of which $30,000,000 in immediately available funds was used for the WO acquisition. This senior credit facility is a four-year term with no principal payments due until maturity and is subject to other terms and conditions. The interest rate is set at LIBOR plus 1.75 - 2.25%, adjusted annually. Interest will be paid quarterly. The $15,000,000 in subordinated debt, issued by Energy Components SPC and Union BanCal Equities, Inc., has a five-year term with no principal payments due until maturity subject to other terms and conditions. The interest rate is set at LIBOR plus 6.5%, adjusted annually. Interest will be paid quarterly. The first year "blended" rate for the senior and subordinated debt is 8.2%.

As a part of the financing terms, 830 boepd of Cano's production will be hedged with a "floor" at $60 per boe in 2006. The floor hedge price for 2007 and 2008 is $55 per boe. The three-year hedge does not have a "ceiling" which would limit the upside potential in the event that oil prices increase.

Jeff Johnson, Cano's chairman and CEO, stated: "This landmark acquisition and the closing of the $115 million credit facility demonstrates our management's commitment and ability to execute Cano's business strategy of acquiring mature onshore U.S. assets that hold significant upside potential through secondary recovery (waterflooding) and enhanced oil recovery (EOR). We will continue to execute this strategy aggressively and will do so as long as opportunities such as WO present themselves."