CFW Cano Petroleum Common Stock

Cano Petroleum, Inc. (NYSE Amex:CFW) today reports its operating results for its third quarter (“Third Quarter of 2011”) and nine months (“Current Nine Months of 2011”) ended March 31, 2011, which are summarized as follows:

            Amounts in $Millions, Fiscal Fiscal Fiscal Fiscal except LOE per BOE Q3 Q3 % 9 Months 9 Months %   2011 2010 Change 2011 2010 Change Operating Revenues $ 6.7 $ 5.8 16 % $ 18.6 $ 16.4 13 % Lease Operating Expense (LOE) $ 2.5 $ 3.6 -31 % $ 9.2 $ 11.8 -22 % LOE per Barrels of Oil Equivalent (BOE) $ 33.58 $ 36.88 -9 % $ 32.52 $ 39.80 -18 % General & Administrative Expenses $ 1.3 $ 2.9 -55 % $ 5.4 $ 9.3 -42 %  

Operating Revenues

Operating revenues were $6.7 million in the Third Quarter of 2011, 16% higher than $5.8 million in the third quarter of 2010 (“Prior Year Quarter”). The $0.9 million increase is attributable to higher prices received for crude oil and natural gas sales and increased natural gas sales volumes, partially offset by decreased crude oil sales volumes. The increase in the natural gas sales volume is primarily due to the return-to-production project at the Desdemona Properties and higher natural gas sales at the Cato Properties since the natural gas purchaser had temporarily declined to take Cato’s natural gas production for most of the prior year quarter. The decreased crude oil sales volumes occurred primarily at the Cato Properties as we worked to restore production facilities damaged due to the weather-related electrical outage during October 2010 and inclement weather at our Panhandle Properties.

During the Third Quarter of 2011, the average prices the Company received for its oil and natural gas were $89.26 per barrel and $9.69 per Mcf. During the Prior Year Quarter, the average prices the Company received for its oil and natural gas were $72.62 per barrel and $9.70 per Mcf.

Operating revenues were $18.6 million in the Current Nine Months of 2011, 13% higher than $16.4 million in the nine months ended March 31, 2010 (“Prior Year Nine Months”). The $2.2 million increase is attributable to higher prices received for crude oil and natural gas sales and increased natural gas sales volumes (as previously discussed), partially offset by decreased crude oil sales volumes, as previously discussed.

During the Current Nine Months of 2011, the average prices the Company received for its oil and natural gas were $79.32 per barrel and $8.53 per Mcf. During the Prior Year Nine Months, the average prices the Company received for its oil and natural gas were $67.56 per barrel and $7.17 per Mcf.

LOE

LOE was $2.5 million in the Third Quarter of 2011, 31% lower than $3.6 million for the Prior Year Quarter. On a BOE basis, LOE for the Third Quarter of 2011 was $33.58, down from $36.88, a reduction of $3.30 from the Prior Year Quarter. The LOE reduction was aided by a credit to expense for costs to restore production facilities of $0.3 million due to the $0.5 million insurance claim settlement partially offset by $0.2 million of costs incurred to restore the facilities. LOE was $9.2 million in the Current Nine Months of 2011, 22% lower than $11.8 million for the Prior Year Nine Months. On a BOE basis, LOE for the Current Nine Months of 2011 was $32.52, down from $39.80, a reduction of $7.28 from the Prior Year Nine Months. This reflects our on-going efforts to reduce LOE. The operational efficiencies which yielded our LOE reduction were primarily driven by reduced service rates, reduced workover expenses, and lower chemical costs.

General & Administrative (G&A) Expenses

G&A expenses were $1.3 million the Third Quarter of 2011, 55% lower than $2.9 million for the Prior Year Quarter. G&A expenses were $5.4 million the Current Nine Months of 2011, 42% lower than $9.3 million for the Prior Year Nine Months. For both the Third Quarter of 2011 and Current Third Months of 2011, our reduced G&A expenses were primarily driven by the termination of the Resaca merger, lower stock-based compensation, lower payroll and benefits expenses and lower fees paid to our board of directors.

Operating Results

For the Third Quarter of 2011, we had a loss applicable to common stock of $5.2 million. We had a loss applicable to common stock of $0.2 million for the Prior Year Quarter. Items that positively impacted the Third Quarter of 2011 were lower operating expenses of $2.6 million and increased operating revenues of $0.9 million. These items were more than offset by increased loss on derivatives of $6.2 million, lower income from discontinued operations of $1.7 million, higher loss on sales of oil and gas properties of $1.0 million, increased interest expense of $0.9 million and increased preferred stock dividend of $0.4 million.

For the Current Nine Months, we had a loss applicable to common stock of $14.8 million. We had a loss applicable to common stock of $13.1 million for the Prior Year Nine Months. Items that positively impacted the Current Nine Months were lower operating expenses of $11.6 million and increased operating revenues of $2.2 million. These items were more than offset by increased loss on derivatives of $7.2 million, increased interest expense of $4.3 million, lower income from discontinued operations of $2.1 million, higher loss on sales of oil and gas properties of $1.0 million and increased preferred stock dividend of $0.9 million.

The increased interest expense for both the Third Quarter of 2011 and Current Nine Months of 2011 is due to additional interest and fees due under the Credit Agreements with our lenders.

Liquidity and Cash flow from Operations

At March 31, 2011, we had cash and cash equivalents of $1.1 million. We currently have very limited access to additional capital. We continue to focus on cost reduction efforts to improve profitability and cash flow from operations. For the Current Nine Months of 2011, our LOE and G&A expenses are $2.6 million and $3.9 million lower, respectively, as compared to the Prior Year Nine Months. We continue to work with our lenders and advisors as we consider strategic alternatives. We continue to make our interest and derivative settlement payments timely to our lenders; however, we were not compliant with our covenant ratios at March 31, 2011. To date, our lenders have taken no definitive actions associated with the termination of the Consent and Forbearance Agreements.

Cash flow from operations was $2.1 million in the Current Nine Months of 2011, a 291% improvement as compared to ($1.1) million for the Prior Year Nine Months. The cash flow increases for the Current Nine Months of 2011 resulted from increased operating revenues, lower operating expenses and the sale of certain natural gas commodity derivative contracts of $0.8 million.

Financial Data

Detailed financial data, including the income statement, balance sheet, cash flow statement and current derivative positions are included in the following pages.

Operations Update

During the Third Quarter of 2011, our primary operating activities focused on continued reduction in LOE expenses, maintaining existing production and restoration of production facilities at the Cato Properties, as previously discussed.

James R. Latimer, III, our CEO commented, "Our quarterly results demonstrate our continued efforts to reduce operating expenses and to maintain consistent revenue levels. We are actively reviewing strategic alternatives to resolve liquidity issues and improve the company.”

No Earnings Conference Call

There will be no earnings conference call.

ABOUT CANO PETROLEUM:

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. Cano trades on the NYSE AMEX under the ticker symbol “CFW”. Additional information is available at www.canopetro.com.

Safe-Harbor Statement — Except for the historical information contained herein, the matters set forth in this news release are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that all such statements be subject to the “safe-harbor” provisions of those Acts. Many important risks, factors and conditions may cause the Company’s actual results to differ materially from those discussed in any such forward-looking statement. These risks include, but are not limited to, estimates or forecasts of reserves, estimates or forecasts of production, future commodity prices, exchange rates, interest rates, geological and political risks, drilling risks, product demand, transportation restrictions, the ability of Cano Petroleum, Inc. to obtain additional capital, and other risks and uncertainties described in the Company’s filings with the Securities and Exchange Commission. The historical results achieved by the Company are not necessarily indicative of its future prospects. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

          CANO PETROLEUM, INC. Operating Revenue Summary  

The table below summarizes our operating revenues for the three- and nine-month periods ended March 31, 2011 and 2010.

  Three months endedMarch 31, Increase Nine monthsended March 31, Increase 2011   2010 (Decrease) 2011   2010 (Decrease) Operating Revenues (in thousands) $ 6,699 $ 5,803 $ 896 $ 18,622 $ 16,368 $ 2,254 Sales Volumes Crude Oil (MBbls) 62 68 (6 ) 197 208 (11 ) Natural Gas (MMcf) 120 90 30 347 324 23 Total (MBOE) 82 83 (1 ) 255 262 (7 ) Average Realized Price Crude Oil ($/ Bbl) $ 89.26 $ 72.62 $ 16.64 $ 79.32 $ 67.56 $ 11.76 Natural Gas ($/ Mcf) $ 9.69 $ 9.70 $ (0.01 ) $ 8.53 $ 7.17 $ 1.36 Operating Revenues and Commodity Derivative Settlements (in thousands) (a) $ 7,033 $ 6,556 $ 477 $ 20,281 $ 20,167 $ 114 Average Adjusted Price (includes commodity derivative settlements) Crude Oil ($/ Bbl) $ 89.25 $ 75.32 $ 13.93 $ 80.97 $ 73.48 $ 7.49 Natural Gas ($/Mcf) $ 12.47 $ 15.99 $ (3.52 ) $ 12.37 $ 15.09 $ (2.72 )

(a) As discussed in Note 5 to our Consolidated Financial Statements, on August 10, 2010, we sold certain natural gas commodity derivative contracts realizing net proceeds of $0.8 million pursuant to the Forbearance Agreement. The $0.8 million is excluded from the commodity derivative settlements listed above.

    Derivative Schedule

As of March 31, 2011, we maintained the following commodity derivative contracts:

  TimePeriod FixedOil Price BarrelsPer Day 4/1/11 - 12/31/11 $ 75.90 700 1/1/12 - 12/31/12 $ 77.25 700       CANO PETROLEUM, INC. CONSOLIDATED BALANCE SHEETS

(Unaudited)

  March 31, June 30, In Thousands, Except Shares and Per Share Amounts 2011 2010 ASSETS Current assets Cash and cash equivalents $ 1,086 $ 300 Accounts receivable 3,145 2,411 Derivative assets — 2,968 Deferred tax asset 3,921 17 Inventory and other current assets   1,061     841   Total current assets   9,213     6,537     Oil and gas properties, successful efforts method 294,190 294,961 Less accumulated depletion and depreciation   (46,934 )   (44,615 ) Net oil and gas properties   247,256     250,346   Fixed assets and other, net 1,319 2,404 Goodwill   101     101   TOTAL ASSETS $ 257,889   $ 259,388     LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 4,165 $ 3,297 Accrued liabilities 4,540 2,304 Oil and gas sales payable 891 804 Derivative liabilities 7,732 410 Current maturity of debt 66,450 66,450 Current maturity of Series D convertible preferred stock, net of unamortized discount of $0.7 million 28,197 — Current portion of asset retirement obligations   203     189   Total current liabilities 112,178 73,454 Long-term liabilities Asset retirement obligations 3,206 2,991 Derivative liabilities 4,784 1,368 Deferred tax liabilities and other   16,935     18,992   Total liabilities   137,103     96,805     Temporary equity Series D convertible preferred stock and cumulative paid-in-kind dividends; par value $.0001 per share, stated value $1,000 per share; 49,116 shares authorized; 23,849 issued at June 30, 2010; liquidation preference at June 30, 2010 of $28,100 — 26,518 Commitments and contingencies Stockholders’ equity Common stock, par value $.0001 per share; 100,000,000 authorized; 47,057,992 and 45,354,915 shares issued and outstanding, respectively, at March 31, 2011; and 47,159,706 and 45,456,629 shares issued and outstanding, respectively, at June 30, 2010 5 5 Additional paid-in capital 190,006 190,500 Accumulated deficit (68,528 ) (53,743 ) Treasury stock, at cost; 1,703,077 shares held in escrow at March 31, 2011 and June 30, 2010, respectively   (697 )   (697 ) Total stockholders’ equity   120,786     136,065   TOTAL LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY $ 257,889   $ 259,388         CANO PETROLEUM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)   Three Months Ended Nine Months Ended March 31, March 31, In Thousands, Except Per Share Data 2011   2010 2011   2010 Operating Revenues: Crude oil sales $ 5,537 $ 4,924 $ 15,661 $ 14,045 Natural gas sales   1,162     879     2,961     2,323   Total operating revenues   6,699     5,803     18,622     16,368     Operating Expenses: Lease operating 2,518 3,598 9,197 11,785 Production and ad valorem taxes 636 476 1,668 1,365 General and administrative 1,285 2,912 5,432 9,360 Exploration expense — — — 5,024 Impairment of long-lived assets — — — 283 Depletion and depreciation 1,111 1,132 3,522 3,627 Accretion of discount on asset retirement obligations   76     68     232     203   Total operating expenses   5,626     8,186     20,051     31,647     Income (loss) from operations 1,073 (2,383 ) (1,429 ) (15,279 ) Other income (expense): Interest expense and other (1,365 ) (486 ) (5,195 ) (908 ) Loss on sale of equipment used in oil and gas operations (1,035 ) — (1,133 ) — Gain (loss) on derivatives   (5,456 )   788     (11,686 )   (4,451 ) Total other income (expense)   (7,856 )   302     (18,014 )   (5,359 )   Loss from continuing operations before income taxes (6,783 ) (2,081 ) (19,443 ) (20,638 ) Deferred income tax benefit   2,457     587     6,911     6,803   Loss from continuing operations (4,326 ) (1,494 ) (12,532 ) (13,835 ) Income from discontinued operations, net of related taxes   —     1,722     —     2,066   Net income (loss) (4,326 ) 228 (12,532 ) (11,769 ) Preferred stock dividend   (887 )   (470 )   (2,253 )   (1,359 ) Net loss applicable to common stock $ (5,213 ) $ (242 ) $ (14,785 ) $ (13,128 )   Net loss per share - basic and diluted Continuing operations $ (0.11 ) $ (0.04 ) $ (0.33 ) $ (0.33 ) Discontinued operations   —     0.04     —     0.05   Net loss per share - basic and diluted $ (0.11 ) $ —   $ (0.33 ) $ (0.28 )   Weighted average common shares outstanding Basic and Diluted   45,426     45,570     45,426     45,570       CANO PETROLEUM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)   Nine Months Ended March 31, Dollar Amounts in Thousands 2011   2010 Cash flow from operating activities: Net loss $ (12,532 ) $ (11,769 ) Adjustments needed to reconcile net loss to net cash provided by (used in) operations: Unrealized loss on derivatives 13,938 8,051 Loss on sale of equipment used in oil and gas operations 1,133 — Gain on sale of oil and gas properties — (2,488 ) Settlement of asset retirement obligations — (140 ) Accretion of discount on asset retirement obligations 232 205 Depletion and depreciation 3,522 3,654 Exploration expense — 5,024 Impairment of long-lived assets — 283 Stock-based compensation expense (489 ) 987 Deferred income tax benefit (6,911 ) (5,638 ) Amortization of debt issuance costs and prepaid expenses 1,597 1,300   Changes in assets and liabilities relating to operations: Accounts receivable (962 ) 775 Derivative assets (5 ) (336 ) Inventory and other current assets and liabilities (724 ) (1,397 ) Accounts payable 869 9 Accrued liabilities   2,420     364   Net cash provided by (used in) operations   2,088     (1,116 )   Cash flow from investing activities: Additions to oil and gas properties, fixed assets and other (1,804 ) (13,445 ) Proceeds from sale of oil and gas properties — 6,300 Proceeds from sale of equipment used in oil and gas operations   498     —   Net cash used in investing activities   (1,306 )   (7,145 )   Cash flow from financing activities: Repayments of long-term debt (550 ) (3,000 ) Borrowings of long-term debt 550 12,300 Proceeds from issuance of common stock, net 4 — Payment of preferred stock dividend   —     (574 ) Net cash provided by financing activities   4     8,726     Net increase in cash and cash equivalents 786 465 Cash and cash equivalents at beginning of period   300     392   Cash and cash equivalents at end of period $ 1,086   $ 857     Supplemental disclosure of noncash transactions: Payments of preferred stock dividend in kind $ 835 $ 835   Supplemental disclosure of cash transactions: Cash paid during the period for interest $ 2,043 $ 2,264