Cano Announces Fiscal Year 2008 Third-Quarter Results and Provides Operational Update: Meaningful Response Seen at Cockrell Ranch Waterflood and Results of Third Party Engineering Report at Cato Field

Business Wire, May 9, 2008

FORT WORTH, Texas -- Cano Petroleum, Inc. (AMEX:CFW) today announced its results for the third quarter ended March 31, 2008. Following are selected highlights:

Third Quarter Results

For the three months ended March 31, 2008, Cano reported production of 1,495 barrels of oil equivalent per day (BOEPD), an increase of 10 percent over the same period last year and 5 percent above the previous quarter of this fiscal year. The production compared to last year benefited from the acquisition and subsequent increased drilling activity in the Cato Field, as well as initial response in the Panhandle Field waterflood (see Operations Update for details).

In the quarter ended March 31, 2008, Cano's sales were 79.2 MBbls of oil and 319 MMcf of natural gas and natural gas liquids, or 132.5 MBOE, a 16 percent increase when compared to the quarter ended March 31, 2007. Cano's revenue for the three-month period ended March 31, 2008, was $11.7 million, up 98 percent compared to the same quarter last year reflecting higher volumes coupled with the increased commodity prices. Cano's realized oil price was $93.16 per barrel and $13.13 per mcf of gas. The company recorded a net loss of $1.9 million which included a non-cash charge of $3.2 million pre-tax for the Unrealized Loss on Commodity Derivatives. During the quarter Cano placed derivative contracts in the form of "costless collars" which are detailed on the attached schedule. The mark-to-market for these contracts at March 31, 2008 represented $2.7 million of the non-cash charge. Income from operations for the quarter (consisting of operating revenues less lease operating expenses, production/ad valorem taxes, general and administrative expense, depletion and depreciation), was $2.1 million compared with a loss of $1.6 million in the quarter last year.

Interest expense for the quarter was $126 thousand compared with $286 thousand last year. Cano capitalizes interest expense on major projects, and after including the capitalized amount, a total of $700 thousand of interest was incurred this quarter compared with $400 thousand last year. In the quarter the company entered into a $25.0 million Subordinated Credit Agreement with UnionBanCal Equities, Inc. ("UBE") as administrative agent. The initial amount available for borrowing was $15 million and was utilized to pay down the Senior Credit Agreement borrowing base. The current interest rate on this debt is 8.51% based on LIBOR plus 5.75%.

During the quarter, the outstanding warrants on common stock totaling 1,646,061 shares were exercised; 1,084,345 warrants were cash exercises for which we received $5.2 million and issued 1,084,345 shares. Additionally, 561,291 warrants were cashless exercises for which 144, 506 shares were issued. A total of 425 warrants were not exercised. As a result, a total of 1,228,850 shares were issued bringing our outstanding shares to 38,689,015 at March 31, 2008. As of March 31, 2008 there are no outstanding warrants.

Nine Months Results

For the nine months ended March 31, 2008, Cano reported a net loss applicable to common stock of $4.8 million, or 14 cents per diluted share which includes a non-cash charge for the Unrealized Loss On Commodity Derivatives of $5.6 million pre-tax. For the same period last year (which ended March 31, 2007), Cano recorded a net loss of $5.2 million, or 17 cents per diluted share. Increased revenues from the Cato acquisition and higher commodity prices were offset by higher operations and General and Administrative expense.

Operations Update

Panhandle Field--Cockrell Ranch Waterflood:

Cano is pleased to report that we have seen meaningful oil and gas production response at the Cockrell Ranch Unit Waterflood (See Production Graph below). Current production at the Cockrell Ranch Unit is approximately 102 gross BOEPD consisting of 77 BOPD, 150 MCFPD and 6,500 BFPD with a 1.2 % oil-cut. This represents an increase of over 100 gross BOEPD from February 1, 2008. Currently, 32 producing wells are evidencing oil-cuts and portions of the Cockrell Ranch Waterflood have produced oil-cuts in excess of 5%. Based upon the use of generally accepted engineering practices and a detailed review of successful analog waterfloods in the area, we expected meaningful response to occur once we have injected enough water to fill 15% to 25% of the Pore Volume space of the reservoir. Presently, we have injected over 7.4 million barrels of water into the Brown Dolomite formation, which represents approximately 15% of the reservoir pore volume.

As we have now reached the threshold injection volume necessary to observe meaningful response, there is now a direct correlation between Pore Volume Injected (PVI%) and Gross Oil and Gas BOEPD Production. As more wells generate response and as the total volume of production increases, oil-cuts should increase and fluid production should also continue to increase in a direct proportion to cumulative injection. We expect oil-cuts in the aggregate to steadily increase to the 2-3% range during the initial response period (as we reach a 25% PVI) and increase toward the 4-5% range within three to six months after this initial response period. Total capital for the Panhandle Field for the Fiscal Year ending June 30, 2008 (FY 2008) is estimated to be $27.7 million.