Cano Petroleum Announces FY 2008 First Quarter Results, Operational Update and Earnings Call

Cano Petroleum, Inc. (Amex:CFW) today announced its financial results for its fiscal year first quarter ended September 30, 2007. Following are selected financial highlights for the quarter. First Quarter Results: For the three months ended September 30, 2007, Cano’s revenues were $8.7 million, which is $1.0 million or 14% over the same period last year and $84 thousand above the previous quarter. The company recorded a net loss attributed to common stock of $ 1.2 million or 4 cents per share compared to a loss of $636 thousand or 2 cents per share last year. The quarter financial results were adversely affected by weather related issues discussed in detail below. Positive factors, including increased revenues of $1.0 million and lower interest expense of $1.4 million, were more than offset by higher operating expenses of $1.1 million, reduced valuation of commodity derivatives of $1.1 million, higher preferred stock dividend of $700 thousand, and lower realized gain on commodity derivatives of $200 thousand. In the quarter, Cano’s sales were 69 MBbls of oil and 352 MMcf of natural gas, or 127 MBOE, a slight increase over last year adjusted for the sale of the Rich Valley Oklahoma asset that occurred in June 2007. As previously mentioned, the current quarter was adversely impacted by heavy rains and electrical storms in Texas and Oklahoma. The flooding damaged compressor stations in Desdemona and electrical outages occurred in the Panhandle. On average for the quarter Cano estimates lost production of about 220 BOEPD attributed to the storms. During the quarter the average prices received for oil were $72.55 per barrel and $10.37 per Mcf or $67.79 per BOE. This compares with $61.35 on a BOE basis for last year. Lease operating expenses of $3.1 million were $300 thousand higher than last year primarily attributed to the weather related outages. Production and ad valorem taxes were $80 thousand higher than last year primarily driven by the higher prices received this year. Depletion and depreciation expense was $1.1 million, or $0.2 million higher than the prior year quarter. For the current quarter, our depletion rate pertaining to our oil and gas properties was $7.34 per BOE as compared to the prior year quarter of $6.57 per BOE. General and Administrative expenses were $500 thousand higher than the prior year related to higher compensation cost including stock compensation and higher legal fees associated with the fire litigation. The interest expense we incurred in the current quarter of $400 thousand was $1.4 million lower than the prior year quarter. This is primarily due to lower debt balances. In addition, the quarter interest expense was reduced by $500 thousand of interest cost that was capitalized to waterflood and ASP projects. During the current and prior year quarters, there were settlements under our derivative agreements received by Cano amounting to $300 thousand and $500 thousand, respectively. The settlements were payments due to Cano since the NYMEX gas price was lower than the $8.00 and $7.60 "floor” natural gas prices. For the current quarter, we recorded an unrealized loss of $500 thousand to reflect the fair value of the commodity derivatives as of September 30, 2007. For the prior year quarter, we recorded an unrealized gain of $500 thousand. (We have attached a schedule of our current commodity derivative positions.) As announced earlier this week, the company closed a $25 million private placement of common equity. This represents 3.5 million shares of common stock. The net proceeds after placement cost and legal expenses are expected to be approximately $23 million of which $21 million is expected to be used for capital expenditures which will be discussed in the Operations Update below. Operational Overview: For the fiscal year 2008 first quarter, Cano drilled and completed 36 wells comprised of 32 waterflood replacement wells at Panhandle and 4 horizontal Barnett Shale wells in the Desdemona Field. Capital spending was approximately $21 million as projects were accelerated at the Panhandle Field waterflood, the Desdemona waterflood and at Cato. Production for the quarter averaged 1,422 BOEPD. As mentioned above and in our September Operations Update, production was reduced by roughly 220 net BOEPD due to severe storms in the Panhandle and at Desdemona Fields. Compared to the trailing quarter, or FY 2007 fourth quarter, production was essentially flat at 1,422 BOEPD compared with 1,446 BOEPD. Versus the first quarter of last year, production was up 5.4% at 1,422 BOEPD compared to 1,349 BOEPD. Current net production is averaging 1,650 BOEPD. As a result of the recently announced private placement equity raise, the Cano 2008 FY capital budget has been increased from $57 million to $78 million. Of the incremental $21 million, $14 million will be used for new well drilling, $3 million will be allocated for facilities and $4 million will be targeted for acquisitions. For the remainder of the year, we now anticipate drilling an additional 133 wells. Sixty-one total wells will be drilled in the Panhandle Field encompassing 36 wells at the waterflood expansion at the Harvey Unit, and 25 wells to further accelerate our next phase of waterflood development. Additionally, 10 wells will be drilled for the waterflood expansion at the Desdemona Field. At the Cato Field a total of 62 new wells will be drilled made up of 11 new 40-acre wells and 51 new 20-acre infill producers to accelerate probable reserve development and initiate Phase I of the waterflood. Panhandle Properties: As we previously reported in our Operational Update in September 2007, severe electrical storms in the Panhandle Field in mid-July knocked off production on over one-quarter of the field for seven days. For the FY 2008 first quarter, it is estimated that production was reduced by approximately 100 BOEPD net as all of the related facility repairs were not completed until mid-September.         Panhandle Properties -- Waterflood   The drilling of the final contingent of 32 replacement waterflood wells was completed in the first fiscal quarter of 2008, one month ahead of schedule. In total, Cano has drilled 70 replacement wells in the field, which represents the completion of the development patterns of the Cockrell Ranch waterflood project. Water injection was initiated at the Cockrell Ranch Unit on July 5, 2007. At the present time, 31 injection wells are delivering over 21,000 barrels of water per day into the Brown Dolomite formation. In total, we have injected close to 1 million barrels of water into the reservoir. As we continue bringing additional injection wells to active status, we anticipate achieving the full 75 well injection pattern by late-November 2007 with a maximum injection rate of 52,500 barrels of water per day. Currently, 71 producing wells are active and awaiting initial response. Preliminary response from the waterflood is anticipated in the December 2007/January 2008 timeframe. Including the incremental $10 million received from the equity raise, total FY 2008 capital for the Panhandle Field is $31 million. New Mexico Properties- Cato Field: We completed the acquisition of the Cato Field on March 30, 2007. As mentioned previously in our September Operations Update, $5 million of additional capital is being deployed to this field from our Barnett Shale program, and including the incremental $11 million from the equity raise, the revised FY 2008 capital budget for the Cato Field is $26 million. The capital spending amount is being increased based on better than expected initial results from return-to-production (RTP’s) workovers and re-frac stimulations performed in the field. Cano has a three-pronged approach to develop the San Andres formation in this field:         1. Return-to-Production and Re-frac stimulations: Cano has worked over 40 idle wells and has RTP’d 19 wells to date with 5 additional wells awaiting electrical connection. We plan to RTP between 60-80 wells during the course of the year. We have deployed re-frac stimulation on six RTP wells in the field. Initial production responses from the re-frac stimulation have been encouraging and we will continue to monitor the results. It is our goal to re-frac up to 25 of the RTP wells during the course of the year. Production in the field has increased from 45 BOEPD when Cano took over operations in April 2007 to current production of over 90 BOEPD. 2. New Well Drilling: One drilling rig was moved to the field on October 22, 2007 and we spud the first of 11 new 40-acre spaced wells in areas of the field that have not been developed. We anticipate initial production responses in the range of 20-40 BOEPD per well based on cumulative production histories of adjacent wells. These wells are relatively shallow at 3,500 feet and drilling and completion costs are estimated to be less than $300,000 per well. 3. 20-Acre Infill Drilling: One drilling rig has been contracted, and a second rig will be secured to drill 51 new 20-acre infill wells in an area of the field that had a prior waterflood pilot. The first rig will spud in November 2007 and the second rig is expected to be secured in January 2008. All of the drilling is expected to be completed by June 2008. Similar to infill results reported by other operators in their analogs of development activity within the San Andres formation, we expect initial production in the range of 15-25 BOEPD from this program. Initiation of Phase I of the waterflood at Cato is scheduled for the second calendar quarter of 2008. Desdemona Properties: Desdemona Properties — Waterflood We received the final approval of our Phase I waterflood permit for the 640 acre G.E. Moore Lease from the Texas Railroad Commission on September 11, 2007. Water injection commenced shortly thereafter and in total, we have averaged 7,000 barrels of water injected per day, or over 350,000 barrels of water in total, into the Duke Sandstone reservoir via 6 injection wells. We currently have 11 producing wells and anticipate an initial waterflood response in the first calendar quarter of 2008. Desdemona Properties — Barnett Shale As we previously reported in our Operational Update in September 2007, severe storms and flooding in the Desdemona Field in late June and early July 2007 curtailed our Barnett Shale production to one-half previous levels or approximately 600 MCFPD. For the first quarter, it is estimated that production was down by approximately 120 BOEPD, or 720 MCFPD. Equipment repairs and well re-works were completed in July and August 2007, and production was not restored to prior levels until late September 2007. We have drilled and completed 4 horizontal wells out of the announced FY 2008 Budget of 24 horizontal wells in the field. Total Barnett Shale production from the field is currently averaging 1.4 MMCFPD. As previously reported, in response to currently low natural gas prices, Cano has elected to defer the drilling program in the Barnett Shale. Of the remaining capital amount of approximately $15 million committed to this program, about $5 million will be re-directed to the Cato Field and the balance of $10 million could be committed to the Barnett Shale program once natural gas prices improve. Nowata Properties: Cano’s Tertiary Recovery Pilot project at the Nowata Field is operational. The ASP pilot plant, associated equipment and supplies were installed and tested during August and September 2007. Full ASP Plant operations are scheduled to begin in November 2007. Response is anticipated in the second calendar quarter of 2008. Corsicana Properties: We have drilled and completed 16 pattern replacement wells and plan to reinstate a prior waterflood in this field. We received the required permits to inject water in June 2007. We are planning to reinstate the prior waterflood in November 2007. As we previously mentioned, we have been pleased with the remaining oil saturations in this field and coupled with the prior successful polymer pilot in this field in the 1980’s we believe this field is a prime ASP candidate. Once the waterflood response and laboratory results are analyzed, we anticipate evaluating an ASP Pilot in the field in calendar year 2008. Jeff Johnson, Cano’s Chairman and CEO, stated, "The next six months will be an exciting time for Cano and its stakeholders. Through the capital programs we embarked on a year ago, I believe we are positioned to see results that will move the company to a new level.” Earnings Call: The Company will hold an earnings call to discuss FY 2008 First Quarter results and provide an update on its operations on Thursday, November 8, 2007, at 3:00 P.M. Eastern Time (2:00 P.M. Central Time). Interested parties can participate in the call by dialing (866) 831-6234. For calls outside the U.S., parties may dial (617) 213-8854. The passcode is 90062251. This call is being webcast by Thomson/CCBN and can be accessed at Cano’s website at www.canopetro.com. The webcast is also being distributed through the Thomson StreetEvents Network. Individual investors can listen to the call at www.earnings.com, Thomson’s individual investor portal, powered by StreetEvents. Institutional investors can access the call via Thomson StreetEvents (www.streetevents.com), a password-protected event management site. 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. Cautionary Notes to Investors -- The Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. Cano uses "non-proved reserves” in this news release, which the SEC’s guidelines strictly prohibit it from including in filings with the SEC. Investors are also urged to consider closely the disclosures in Cano’s Form 10-K for the fiscal year ended June 30, 2007, available from Cano by calling 866-314-2266. This form also can be obtained from the SEC at www.sec.gov. FINANCIAL STATEMENTS AND SCHEDULES TO FOLLOW CANO PETROLEUM, INC. Operating Revenue Summary Three months Ended September 30, 2007 and 2006 See Form 10-Q and accompanying notes to these unaudited financial statements CANO PETROLEUM, INC. Consolidated Balance Sheets September 30, 2007 and June 30, 2007 See Form 10-Q and accompanying notes to these unaudited financial statements CANO PETROLEUM, INC. Consolidated Statements of Operations Three months Ended September 30, 2007 and 2006 See Form 10-Q and accompanying notes to these unaudited financial statements CANO PETROLEUM, INC. Operating Revenue Summary       Quarter Ended September 30, Increase (Decrease) 2007 2006   Operating Revenues $ 8,721,165 $ 7,674,800 $ 1,046,365 Sales • Oil (MBbls) 69 70 (1 ) • Gas (MMcf) 352 330 22 • Total (MBOE) 127 125 2 Average Price • Oil ($/ Bbl) $ 72.55 $ 69.19 $ 3.36 • Gas ($/ Mcf) $ 10.37 $ 8.56 $ 1.81 Hedging Schedule           Time Period Floor Oil Price Barrels per Day Floor Gas Price Gas Mcf per Day Barrels of Equivalent Oil per Day 1/1/07 - 12/31/07 $ 55 507 $ 8.00 1,644 781 1/1/07 - 12/31/07 $ 60 72 $ 7.60 658 182 1/1/08 - 12/31/08 $ 55 479 $ 7.50 1,534 735 1/1/08 - 12/31/08 $ 60 66 $ 7.60 592 164 1/1/09 - 4/30/09 $ 60 59 $ 7.60 559 152 1/1/09 - 12/31/09 $ 55 395 $ 7.60 1,644 668 1/1/10 - 6/30/10 $ 55 365 $ 7.00 1,657 641 7/1/10 - 12/31/10 $ 55 395 $ — — 395 Time Period   Ceiling Oil Price   Barrels per Day   Ceiling Gas Price   Gas Mcf per Day   Barrels of Equivalent Oil per Day 8/1/07 - 12/31/07 $ 83 493 $ — — 493 1/1/08 - 6/30/08 $ 86 460 $ — — 460 CANO PETROLEUM, INC. CONSOLIDATED BALANCE SHEETS   ASSETS September 30, June 30, 2007 2007 Current assets (Unaudited) Cash and cash equivalents $ 583,842 $ 2,119,098 Restricted cash 6,000,000 — Accounts receivable 3,668,970 4,081,498 Prepaid assets 822,463 309,216 Derivative assets 422,513 810,174 Inventory and other current assets 308,631 292,540 Total current assets 11,806,419 7,612,526 Oil and gas properties, successful efforts method 211,359,256 189,842,882 Less accumulated depletion and depreciation (7,281,156 ) (6,201,635 ) Net oil and gas properties 204,078,100 183,641,247 Fixed assets and other, net 1,541,278 1,547,875 Restricted cash — 6,000,000 Derivative assets 1,626,224 1,881,800 Goodwill 785,796 785,796 TOTAL ASSETS $ 219,837,817 $ 201,469,244 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 10,563,376 $ 7,508,795 Oil and gas sales payable 1,527,628 1,345,537 Accrued liabilities 1,107,429 1,421,484 Taxes payable 535,343 450,062 Current portion of asset retirement obligations 269,941 264,140 Total current liabilities 14,003,717 10,990,018 Long-term liabilities Long-term debt 49,000,000 33,500,000 Asset retirement obligations 2,174,525 2,150,930 Deferred litigation credit 6,000,000 6,000,000 Deferred tax liability 32,228,000 32,371,000 Total liabilities 103,406,242 85,011,948 Temporary equity Series D convertible preferred stock and paid-in-kind dividend; par value $.0001 per share, stated value $1,000 per share; 49,116 authorized and 49,116 shares issued; liquidation preference of $51,395,886 and $50,862,925, respectively. 48,129,021 47,596,061 Commitments and contingencies Stockholders’ equity Common stock, par value $.0001 per share; 100,000,000 authorized; 34,351,392 and 33,083,098 shares issued and outstanding at September 30, 2007, respectively; and 33,956,392 and 32,688,098 shares issued and outstanding at June 30, 2007, respectively. 3,435 3,396 Additional paid-in capital 85,924,948 85,238,362 Accumulated deficit (17,055,097 ) (15,809,791 ) Treasury stock, at cost; 1,268,294 shares held in escrow (570,732 ) (570,732 ) Total stockholders’ equity 68,302,554 68,861,235 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 219,837,817 $ 201,469,244  CANO PETROLEUM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)   Three Months Ended September 30, 2007 2006 Operating Revenues: Crude oil and natural gas sales $ 8,721,165 $ 7,674,800 Operating Expenses: Lease operating 3,102,998 2,771,731 Production and ad valorem taxes 699,356 618,711 General and administrative 3,622,209 3,145,037 Depletion and depreciation 1,134,669 976,952 Accretion of discount on asset retirement obligations 54,402 28,891 Total operating expenses 8,613,634 7,541,322 Income from operations 107,531 133,478 Other income (expenses): Interest expense (399,497 ) (1,842,714 ) Unrealized gain (loss) on commodity derivatives (516,037 ) 536,026 Realized gain on commodity derivatives 296,480 516,329 Interest income 103,189 16,768 Total other income (expenses) (515,865 ) (773,591 ) Income (loss) from continuing operations before income taxes (408,334 ) (640,113 ) Income tax benefit 130,000 197,200 Income (loss) from continuing operations (278,334 ) (442,913 ) Income from discontinued operations, net of taxes — 75,021 Net income (loss) (278,334 ) (367,892 ) Preferred stock dividend 966,972 268,604 Net loss applicable to common stock $ (1,245,306 ) $ (636,496 ) Net income (loss) per share - basic and diluted Continuing operations $ (0.04 ) $ (0.02 ) Discontinued operations — — Net loss per share - basic and diluted $ (0.04 ) $ (0.02 ) Weighted average common shares outstanding Basic and diluted 32,615,815 26,043,250