EXHIBIT 10.2

SUPPLEMENT NO. 2 dated as of March 6, 2007 (the “Supplement”), to the Guaranty
Agreement dated as of November 29, 2005 (as heretofore amended, supplemented or
otherwise modified from time to time, the “Guaranty Agreement”), among each of
the subsidiaries party thereto (each such subsidiary individually, a “Guarantor”
and collectively, the “Guarantors”) of CANO PETROLEUM, INC., a Delaware
corporation (the “Borrower”) in favor of UNION BANK OF CALIFORNIA, N.A., as
Administrative Agent (the “Administrative Agent”) for the benefit of the
Beneficiaries (as defined in the Guaranty Agreement).

A.            Reference is made to the Credit Agreement dated as of November 29,
2005 (as heretofore and hereafter amended, supplemented or otherwise modified
from time to time, the “Credit Agreement”), among the Borrower, the lenders from
time to time party thereto (the “Lenders”), and the Administrative Agent.

B.            Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to such terms in the Guaranty Agreement and the
Credit Agreement.

C.            The Guarantors have entered into the Guaranty Agreement in order
to induce the Lenders to make Advances and the Issuing Lender to issue Letters
of Credit.  Pursuant to Section 6.15 of the Credit Agreement, the Subsidiaries
of the Borrower are required to enter into the Guaranty Agreement as
Guarantors.  Section 16 of the Guaranty Agreement provides that additional
Subsidiaries of the Borrower may become Guarantors under the Guaranty Agreement
by execution and delivery of an instrument in the form of this Supplement.  The
undersigned Subsidiary of the Borrower (the “New Guarantor”) is executing this
Supplement in accordance with the requirements of the Credit Agreement to become
a Guarantor under the Guaranty Agreement in order to induce the Lenders to make
additional Advances and the Issuing Lender to issue additional Letters of Credit
and as consideration for Advances previously made and Letters of Credit
previously issued.

Accordingly, the Administrative Agent and the New Guarantor agree as follows:

SECTION 1.           In accordance with Section 16 of the Guaranty Agreement,
the New Guarantor by its signature below becomes a Guarantor under the Guaranty
Agreement with the same force and effect as if originally named therein as a
Guarantor and the New Guarantor hereby (a) agrees to all the terms and
provisions of the Guaranty Agreement applicable to it as a Guarantor thereunder
and (b) represents and warrants that the representations and warranties made by
it as a Guarantor thereunder are true and correct in all material respects on
and as of the date hereof.  Each reference to a “Guarantor” in the Guaranty
Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement
is hereby incorporated herein by reference.

SECTION 2.           The New Guarantor represents and warrants to the
Administrative Agent and the other Beneficiaries that this Supplement has been
duly authorized, executed and delivered by it and constitutes its legal, valid
and binding obligation, enforceable against it in accordance with its terms
(subject to applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting creditors’ rights generally and subject, as to
enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)).

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SECTION 3.           This Supplement may be executed in counterparts, each of
which shall constitute an original, but all of which when taken together shall
constitute a single contract.  This Supplement shall become effective when the
Administrative Agent shall have received counterparts of this Supplement that,
when taken together, bear the signatures of the New Guarantor and the
Administrative Agent. Delivery of an executed signature page to this Supplement
by fax transmission shall be as effective as delivery of a manually executed
counterpart of this Supplement.

SECTION 4.           Except as expressly supplemented hereby, the Guaranty
Agreement shall remain in full force and effect.

SECTION 5.           THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.  The New Guarantor
hereby irrevocably submits to the jurisdiction of any Texas state or federal
court sitting in Dallas, Texas in any action or proceeding arising out of or
relating to this Supplement or the Guaranty Agreement and the other Loan
Documents, and the New Guarantor hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such court. 
The New Guarantor hereby irrevocably waives, to the fullest extent it may
effectively do so, any right it may have to the defense of an inconvenient forum
to the maintenance of such action or proceeding.  The New Guarantor hereby
agrees that service of copies of the summons and complaint and any other process
which may be served in any such action or proceeding may be made by mailing or
delivering a copy of such process to such Guarantor at its address set forth on
the signature page hereof.  The New Guarantor agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law. 
Nothing in this Section shall affect the rights of any Beneficiary to serve
legal process in any other manner permitted by the law or affect the right of
any Beneficiary to bring any action or proceeding against the New Guarantor or
its Property in the courts of any other jurisdiction.

SECTION 6.           In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and in the Guaranty Agreement shall not in any way be affected or
impaired thereby (it being understood that the invalidity of a particular
provision hereof in a particular jurisdiction shall not in and of itself affect
the validity of such provision in any other jurisdiction).  The parties hereto
shall endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.

SECTION 7.           All communications and notices hereunder shall be in
writing and given as provided in Section 10 of the Guaranty Agreement.  All
communications and notices hereunder to the New Guarantor shall be given to it
at the address set forth under its signature below.

SECTION 8.           The New Guarantor agrees to reimburse the Administrative
Agent for its reasonable out-of-pocket expenses in connection with this
Supplement, including the fees, disbursements and other charges of counsel for
the Administrative Agent.

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SECTION 9.           PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND
COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENT EXCEEDS
$50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND
SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.

THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE
PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN AGREEMENT, AND
ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO
THIS GURANTY.  THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

IN WITNESS WHEREOF, the New Guarantor and the Administrative Agent have duly
executed this Supplement to the Guaranty Agreement as of the day and year first
above written.

 

NEW GUARANTOR:

 

CANO PETRO OF NEW MEXICO, INC.

 

 

 

By:

/s/ S. Jeffrey Johnson

 

Name:

S. Jeffrey Johnson

 

Title:

President

 

 

 

Address of New Guarantor:

 

801 Cherry Street, Unit 25

 

Suite 3200

 

Fort Worth, Texas 76102

 

 

 

 

ADMINISTRATIVE AGENT:

 

 

 

UNION BANK OF CALIFORNIA, N.A., as Administrative Agent

 

 

By:

/s/ Kimberly Coil

 

 

Kimberly Coil

 

 

Vice President

 

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