EXHIBIT 10.4


SUPPLEMENT NO. 2 
dated as of March 6, 2007 (the “Supplement”), to the Pledge
Agreement dated as of November 29, 2005 (as heretofore amended, supplemented or
otherwise modified from time to time, the “Pledge Agreement”) by and
among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”), each
other party signatory hereto (together with the Borrower, the “Pledgors”
and individually, each a “Pledgor”) and Union Bank of California, N.A.
as collateral trustee (in such capacity, the “Collateral Trustee”) under the
Collateral Trust Agreement (as hereinafter defined) for the benefit of the
Secured Parties (as hereinafter defined).


RECITALS


A.            Reference is made to the following documents related to
extension of credit to the Borrower:


(i)            that certain Credit Agreement dated
as of November 29, 2005 (as heretofore and hereafter amended, restated or
otherwise modified from time to time, the “Senior Credit Agreement”) by
and among the Borrower, the lenders party thereto from time to time (the “Senior
Lenders”), and Union Bank of California, N.A., as administrative agent for
such Senior Lenders (the “Senior Agent”); and


(ii)           those Hedge Contracts (as defined in
the Senior Credit Agreement) that the Borrower or any of its Subsidiaries may
from time to time enter into one or more with a Senior Lender or one of their
Affiliates (a “Swap Counterparty”, and together with the Collateral
Trustee, the Senior Agent, the Issuing Lender, and the Senior Lenders, the “Secured
Parties”).


B.            In connection with the Senior Credit Agreement, the
Senior Agent, the Senior Lenders, the Collateral Trustee, the Borrower, and
other parties thereto, have entered into that certain Collateral Trust and
Intercreditor Agreement dated as of even date herewith (as it may be amended,
restated, or otherwise modified from time to time, the “Collateral Trust
Agreement”), to among other things, appoint the Collateral Trustee as
collateral trustee for all of the Secured Parties under the security documents
executed in connection with the Senior Credit Agreement, including the Pledge
Agreement, and set forth the rights and remedies of the Secured Parties with
respect thereto.


C.            The Borrower and the other Pledgors have entered into the
Pledge Agreement in order to induce the Lenders to make Advances and the
Issuing Lender to issue Letters of Credit. 
The Borrower, as the equity holder of a new Subsidiary that was not in
existence on the date of the Senior Credit Agreement, wishes to enter into this
Supplement to pledge the equity interest in such new Subsidiary as additional
Pledged Collateral.  The Borrower is
executing this Supplement in accordance with the requirements of the Credit
Agreement to supplement its Pledged Collateral under the Pledge 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.


D.            Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to such terms in the Pledge Agreement and the Senior Credit Agreement.


Accordingly, the Collateral Trustee and the Pledgors
agree as follows:













 


SECTION 1.           The Borrower by its signature below
(a) reaffirms all the terms and provisions of the Pledge Agreement
applicable to it as a Pledgor thereunder and (b) represents and warrants
that the representations and warranties made by it as a Pledgor thereunder are
true and correct on and as of the date hereof in all material respects.  The Pledge Agreement is hereby incorporated
herein by reference.


SECTION 2.           The Borrower hereby agrees that the
term “Pledged Shares” as used in the Pledge Agreement is hereby supplemented to
include all of the interests listed in the attached Schedule 2.02(c).  In furtherance of the foregoing, as security
for the payment and performance in full of the Secured Obligations, the
Borrower does hereby create and grant to the Collateral Trustee, its successors
and assigns, for the benefit of the Secured Parties, their successors and
assigns, a continuing security interest in and lien on all of the Borrower’s
right, title and interest in and to the Pledged Collateral (as defined in the
Pledge Agreement and as supplemented and amended hereby) of the Borrower.


SECTION 3.           The Borrower represents and warrants
to the Collateral Trustee and the other Secured Parties 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)).


SECTION 4.           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 Collateral Trustee shall have received counterparts of this Supplement
that, when taken together, bear the signatures of the Pledgors and the
Collateral Trustee.  Delivery of an
executed signature page to this Supplement by facsimile transmission shall be
as effective as delivery of a manually signed counterpart of this Supplement.


SECTION 5.           Each Pledgor hereby represents and
warrants that (a) set forth on Schedules 2.02(a), 2.02(b), and 2.02(c) attached
hereto are true and correct schedules of all its Membership Interests,
Partnership Interests and Pledged Shares, as each term is defined in the Pledge
Agreement, and (b) set forth on Schedule 3 attached hereto are its respective
sole jurisdiction of formation, type of organization, its federal tax
identification number and the organizational number, and all names used by it
during the last five years prior to the date of this Supplement.


SECTION 6.           Except as expressly supplemented
hereby, the Pledge Agreement shall remain in full force and effect.


SECTION 7.           THIS SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY



 2
 









 


PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS
OF A JURISDICTION OTHER THAN THE STATE OF TEXAS.


SECTION 8.           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, neither party hereto shall be required to comply
with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Pledge Agreement shall not in
any way be affected or impaired.  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 9.           All communications and notices
hereunder shall be in writing and given as provided in the Pledge Agreement.


SECTION 10.         The
Borrower agrees to reimburse the Collateral Trustee for its reasonable
out-of-pocket expenses in connection with this Supplement, including the
reasonable fees, other charges and disbursements of counsel for the Collateral
Trustee.


THIS
SUPPLEMENT, THE PLEDGE AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES 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 HERETO.


[SIGNATURES PAGES
FOLLOW]



 3
 









 


IN WITNESS WHEREOF, the
Pledgors and the Collateral Trustee have duly executed this Supplement to the
Pledge Agreement as of the day and year first above written.


 


	
  

  	
  PLEDGORS:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. ENERGY OF NEVADA, INC.

  
	
   

  	
  WO ENERGY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  Each by:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  COLLATERAL TRUSTEE:

  	
   

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kimberly Coil

  
	
   

  	
   

  	
  Kimberly Coil

  
	
   

  	
   

  	
  Vice President

  
					



 



 4














Exhibit
10.4


Schedules

Supplement No. 2

to the Pledge Agreement


Pledged Collateral


SCHEDULE 2.02(a)


	
  

  	
   

  	
   

  	
   

  	
  Type of
  Membership

  	
   

  	
  % of
  Membership

  	
   

  
	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Interest

  	
   

  	
  Interest
  Owned

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Pantwist, LLC

  	
   

  	
  Limited liability

  	
   

  	
  100%

  	
   

  



 


SCHEDULE 2.02(b)


	
  

  	
   

  	
   

  	
   

  	
  Type of Partnership 

  	
   

  	
  % of Partnership 

  
	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Interest

  	
   

  	
  Interest Owned

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  W.O. Operating Company, Ltd.

  	
   

  	
  Limited Partnership Interest

  	
   

  	
  95% Limited Partnership Interest

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  W.O. Production Company, Ltd.

  	
   

  	
  Limited Partnership Interest

  	
   

  	
  95% Limited Partnership Interest

  
	
  WO Energy, Inc.

  	
   

  	
  W.O. Operating Company, Ltd.

  	
   

  	
  General Partnership Interest

  	
   

  	
  5% General Partnership Interest

  
	
  WO Energy, Inc.

  	
   

  	
  W.O. Production Company, Ltd.

  	
   

  	
  General Partnership Interest

  	
   

  	
  5% General Partnership Interest

  



 


SCHEDULE
2.02(c)


	
  

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Number

  	
   

  	
   

  	
   

  	
   

  
	
  

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   of 

  	
   

  	
  % of Shares 

  	
   

  	
  Certificate

  
	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Shares

  	
   

  	
  Owned

  	
   

  	
  No.

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Square One Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,500

  	
   

  	
  100%

  	
   

  	
  4

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Ladder Companies, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,000

  	
   

  	
  100%

  	
   

  	
  7

  
	
  Cano Petroleum, Inc.

  	
   

  	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,200

  	
   

  	
  100%

  	
   

  	
  5

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  WO Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,100

  	
   

  	
  100%

  	
   

  	
  6

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Cano Petro of New Mexico, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  100

  	
   

  	
  100%

  	
   

  	
  1

  



 


 


Schedules 2.02(a),
2.02(b) and 2.02(c)











SCHEDULE
3


PLEDGOR
INFORMATION


	
  Pledgor:

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  3664494

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  77-0635673

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Pledgor:

  	
   

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Nevada

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  C20757-1996-001

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  88-0369151

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Pledgor:

  	
   

  	
  WO Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  113518200

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2303966

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  



 


 


 


 


Schedule 3