Cano Petroleum Provides Operational Update

Cano Petroleum, Inc. (Amex:CFW) ("Cano”) today provided the following update of its production and operations, and reported that drilling and capital expenditures under its FY 2008 Capital Budget are on schedule. Operational Update Through October 2007, Cano has spent roughly $29 MM out of its approved $78 MM FY 2008 Capital Budget. Cano recently announced the closing of a $25 MM equity raise, which has increased its FY 2008 Capital Budget from $57 MM to $78 MM. Listed below is a table representing capital spending by field and current net daily production accompanied with specific project highlights:   Capital   Current Production (a) ($MM) (Net BOEPD) (b) Panhandle $ 11.2 607 Cato 6.5 71 Pantwist -- 333 Desdemona: Barnett Shale 5.5 200 Waterflood 3.9 5 Corsicana 0.4 0 Nowata ASP 0.8 235 Davenport   0.5 64 Total $ 28.8 1,515   (a) October 2007 full-month actual (unaudited) production.   (b) Barrels of Oil Equivalent per Day Panhandle Properties — Waterflood We are seeing preliminary response from nine producing wells. Increased water inflow, gas cut and incremental gas rates are being reported. This is setting the stage for the waterflood response at the Cockrell Ranch Unit. Engineering calculations indicate that meaningful oil response will occur after approximately .15 to .25 Pore Volumes (PV) of water has been injected. Simply put, when 15% to 25% of the void space has been displaced with water, the flood fronts have advanced to a point where production response should be seen at the producing wells. As of today, we have injected over 1.3 million barrels of water into 34 injection wells at the Cockrell Ranch. We have increased and maintained our water injection rate at the Cockrell Ranch Unit at over 30,000 barrels of water per day (BWPD). Additionally, we will be operational next week with additional deliverability of 10,000 BWPD to the wells. This will get our injection deliverability to over 40,000 BWPD. We are in the processes of installing a permanent 10 inch water trunk line, that when complete, will take us to the required 52,500 BWPD capacity for the injection system by the end of December 2007 (weather permitting). In the south area of the Cockrell Ranch, which has been under injection since July 2007, has taken between 7% PV and 10% PV. At the new injection rates, this puts us within 45-60 days away from a 15% - 25% PV threshold. In the northeast area, we have injected over 600,000 BW and have between 5% to 7% PV injected. Given the new injection rates, we will be at 15% - 25% PV, or in a position to see meaningful response in 65-90 days. New Mexico Properties – Cato Field We completed the acquisition of the Cato Field on March 30, 2007. As mentioned previously, and with the recently announced equity raise, our FY 2008 Capital Budget has been increased to $27.1 million. Cano has a four-pronged approach to develop the San Andres formation in this field: 1. Return-to-Production (RTP): We have brought on 31 new wells since the acquisition. We are planning on an additional 9 wells on the Tomahawk lease next week. Since the acquisition, we have increased production from 45 BOEPD to currently over 80 BOEPD through the RTP program. 2. New Well Drilling: We have drilled two 40-acre spaced wells and have results from the three zones of the San Andres formation (P-1, P-2, and P-3). The results of the two wells are summarized below: Well #407: We encountered 12 feet of P-2 and 48 feet of P-1 pay intervals. We fracture stimulated the well on December 1, 2007. We are currently in the process of recovering load water and are encouraged by the initial results. Well #404: We encountered 12 feet of P-3, 40 feet of P-2 and 40 feet of P-1 pay intervals. We are currently testing the P-3. We acidized on November 20, 2007 and initial flowback had gas and oil to surface with near virgin reservoir pressures. We performed fracture stimulation treatment on December 1, 2007 and we are currently swab testing the P-3 zone to gauge flow rates. We will sequentially move up hole to stimulate and test each zone. 3. 20-Acre Infill Drilling: We have spud the #517 well and are drilling to 3,500 feet. We should reach total depth by the end of the week. We added a second drilling rig on December 3, 2007 to drill 20-acre infill wells. 4. 20-Acre Waterflood Development: We intend to accelerate the waterflood development by drilling fifty-one 20-acre infill wells. Our goal is to drill and complete all 51 wells by fiscal year-end June 2008 and commence waterflood operations. Desdemona Properties: Desdemona Properties — Waterflood. We have injected over 700,000 barrels of water into the Duke Sand to date. We are seeing oil response at two producers. Total production at these two wells is currently 22 BOEPD, 350 BWPD and 6 MCFPD. Since this is not a pattern waterflood, but a peripheral flood, the Pore Volume fill-up method is not as exact as the Panhandle Field for determining response profiles. However, we expect meaningful increases in the number of responding wells and increased oil response in the next 30-60 days. Desdemona Properties — Barnett Shale After we stopped our drilling program in the Barnett Shale, decline rates have been experienced in gas production. For October 2007, we had average daily production rate of 1.2 MMCFD net (200 BOEPD). In November 2007, we are averaging roughly 900 MCFPD net (150 BOEPD). In December 2007, we have started processing Barnet Shale gas through our gas plant to recover additional liquids. Initial results appear positive and would allow us to capture incremental BTU value of the product stream. We continue to supply the Desdemona Field waterflood with over 7,000 BWPD of produced water for injection from the Barnett Shale gas production. Nowata Properties. We began injecting a full ASP recipe on November 9, 2007. We continue to work through water-softening issues with the plant, but expect to continue constant injection going forward. We are installing a fresh-water back-up system to alleviate any future plant down-time. Response is anticipated in the second calendar quarter of 2008. Corsicana Properties. We should have the waterflood re-instated by December 7, 2007. At full injection of 4,000 BWPD, we should experience a 0.5 -1.0% oil-cut and produce between 20-40 BOEPD. 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 American Stock Exchange 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.