EXHIBIT 10.5


ASSIGNMENT AND AGREEMENT


This ASSIGNMENT AND AGREEMENT (“Agreement”) entered into and made
effective as of March 7, 2007 (“Effective Date”) is among Cano Petroleum,
Inc., a Delaware corporation (“Borrower”), the Guarantors (as defined below),
the Lenders (as defined below), and Union Bank of California, N.A., as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”) and as issuing lender (in such capacity, the “Issuing Lender”).


RECITALS


A.            The Borrower is party to that
certain Credit Agreement dated as of November 29, 2005, as amended by the
Amendment No. 1 dated as of February 24, 2006, and as amended by the Amendment
No. 2, Assignment and Agreement dated as of April 28, 2006, Amendment No. 3
entered into on May 12, 2006 but made effective as of March 31, 2006, Amendment
No. 4 dated as of June 30, 2006, and Amendment No. 5 and Agreement dated as of
March 6, 2007 (as so amended, the “Credit Agreement”) among the Borrower, the
lenders party thereto from time to time (the “Lenders”), the Administrative
Agent, and the Issuing Lender.


B.            In connection with the Credit
Agreement, Union Bank of California, N.A., as a Lender under the Credit
Agreement (“Assignor”) wishes to assign a certain percentage of its rights and
obligations under the Credit Agreement as a Lender to Natixis (formerly known
as Natexis Banques Populaires) as a Lender under the Credit Agreement (“Assignee”).


C.            After
giving effect to such assignment from the Assignor to the Assignee as provided
herein, the Borrower, the Lenders and the Administrative Agent wish to, subject
to the terms and conditions of this Agreement, decrease the Borrowing Base as
provided herein.


THEREFORE, the Borrower, the Guarantors, the
Lenders, and the Administrative Agent hereby agree as follows:


Section 1.              Defined
Terms.  As used in
this Agreement, each of the terms defined in the opening paragraph and the
Recitals above shall have the meanings assigned to such terms therein.  Each term defined in the Credit Agreement and
used herein without definition shall have the meaning assigned to such term in
the Credit Agreement, unless expressly provided to the contrary.


Section 2.              Other
Definitional Provisions. Article, Section, Schedule,
and Exhibit references are to Articles and Sections of and Schedules and
Exhibits to this Agreement, unless otherwise specified.  All references to instruments, documents,
contracts, and agreements are references to such instruments, documents,
contracts, and agreements as the same may be amended, supplemented, and
otherwise modified from time to time, unless otherwise specified.  The words “hereof”, “herein”, and “hereunder”
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement.  The term “including” means “including,
without limitation,”.  Paragraph headings
have been inserted in this Agreement as a matter of convenience for reference
only and it is agreed that such paragraph headings are not a part of this Agreement
and shall not be used in the interpretation of any provision of this Agreement.












Section
3.              Assignment.  Assignor hereby sells and assigns to Assignee, without
recourse and without representation or warranty other than as expressly
provided herein, and the Assignee hereby purchases and assumes from Assignor,
such percentage in and to all of the Assignor’s rights and obligations under
the Credit Agreement as a Lender (including, without limitation, such
percentage interest in the Advances owing to the Assignor and the Assignor’s
risk participation and funded participation in Letter of Credit Obligations
existing as of the date hereof (prior to the effectiveness of this Agreement)
that would result in the Assignor and the Assignee having the respective
Commitments set forth next to its name on the signature page hereof.  After giving effect to the sale and
assignment pursuant to this Section 3, each Lender’s respective Commitment will
be as set forth next to its name on the signature page hereof.  Assignor (i) represents and warrants that it
is the legal and beneficial owner of the interest being assigned by it
hereunder and that such interest is free and clear of any adverse claim; (ii)
makes no representation or warranty and assumes no responsibility with respect
to any statements, warranties or representations made in or in connection with
the Credit Agreement, the other Loan Documents or any other instrument or
document furnished pursuant thereto or in connection therewith, or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of, or the perfection or priority of any Lien created or purported to be
created under or in connection with, the Credit Agreement, any of the other
Loan Documents or any other instrument or document furnished pursuant thereto
or in connection therewith; and (iii) makes no representation or warranty and
assumes no responsibility with respect to the financial condition of Borrower
or any other Person or the performance or observance by Borrower or any other
Person of any of its respective obligations under the Credit Agreement, any of
the other Loan Documents or any other instrument or document furnished pursuant
thereto or in connection therewith.  The
Assignee agrees that it will, independently and without reliance upon the
Assignor and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Credit Agreement, any of the other Loan Documents
or any other instrument or document.


Section 4.              Covenant. 
Concurrently with the delivery of this Agreement, the Borrower shall
deliver new Notes to the Administrative Agent evidencing the new Commitments of
the Lenders as a result of the assignment effected pursuant hereto.


Section 5.              Decrease
in the Borrowing Base. 
Subject to the terms of this Agreement, the Lenders and the Borrower
hereby agree that as of the Effective Date the Borrowing Base shall be
$48,000,000 and such Borrowing Base shall remain in effect at that level until
the Borrowing Base is redetermined or reduced in accordance with the Credit
Agreement, as amended hereby.


Section 6.              Borrower Representations and Warranties.  The Borrower represents and warrants that:
(a) after giving effect to this Agreement, the representations and warranties
contained in the Credit Agreement and the representations and warranties
contained in the other Loan Documents are true and correct in all material
respects on and as of the Effective Date as if made on as and as of such date
except to the extent that any such representation or warranty expressly relates
solely to an earlier date, in which case such representation or warranty is
true and correct in all material respects as of such earlier date; (b) after giving
effect to this Agreement, no Default has occurred and is continuing; (c) the execution,
delivery and performance of this Agreement are within the corporate power and
authority of the Borrower and 



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have been duly authorized by
appropriate corporate and governing action and proceedings; (d) this Agreement
constitutes the legal, valid, and binding obligation of the Borrower
enforceable in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting
the rights of creditors generally and general principles of equity; (e) there
are no governmental or other third party consents, licenses and approvals
required in connection with the execution, delivery, performance, validity and
enforceability of this Agreement; and (f) the Liens under the Security
Instruments are valid and subsisting and secure Borrower’s obligations under
the Loan Documents.


Section 7.              Guarantors Representations and Warranties.  Each Guarantor represents and warrants that:
(a) after giving effect to this Agreement, the representations and warranties
contained in the Guaranty and the representations and warranties contained in
the other Loan Documents are true and correct in all material respects on and
as of the Effective Date as if made on as and as of such date except to the
extent that any such representation or warranty expressly relates solely to an
earlier date, in which case such representation or warranty is true and correct
in all material respects as of such earlier date; (b) after giving effect to
this Agreement, no Default has occurred and is continuing; (c) the execution,
delivery and performance of this Agreement are within the corporate, limited
liability company, or partnership power and authority of such Guarantor and
have been duly authorized by appropriate corporate, limited liability company,
or partnership action and proceedings; (d) this Agreement constitutes the
legal, valid, and binding obligation of such Guarantor enforceable in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the rights of
creditors generally and general principles of equity; (e) there are no
governmental or other third party consents, licenses and approvals required in
connection with the execution, delivery, performance, validity and
enforceability of this Agreement; (f) it has no defenses to the enforcement of
the Guaranty; and (g) the Liens under the Security Instruments are valid and subsisting
and secure such Guarantor’s and the Borrower’s obligations under the Loan
Documents.


Section 8.              Conditions to Effectiveness.  This Agreement and the
amendments to the Credit Agreement provided herein shall become effective on
the Effective Date and enforceable against the parties hereto upon the
occurrence of the following conditions precedent:


(a)           The Administrative Agent shall have
received multiple original counterparts, as requested by the Administrative
Agent, of this Agreement duly and validly executed and delivered by duly
authorized officers of the Borrower, the Guarantors, the Administrative Agent,
and the Lenders.


(b)           The representations
and warranties in this Agreement shall be true and correct in all material
respects.


(c)           The Borrower shall have paid all fees
and expenses of the Administrative Agent’s outside legal counsel and other
consultants pursuant to all invoices presented for payment on or prior to the
Effective Date.



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Section 9.              Acknowledgments and Agreements.


(a)           The Borrower acknowledges that on the
date hereof all Obligations are payable without defense, offset, counterclaim
or recoupment.


(b)           The Administrative
Agent and the Lenders hereby expressly reserve all of their rights, remedies,
and claims under the Loan Documents.  Nothing
in this Agreement shall constitute a waiver or relinquishment of (i) any
Default or Event of Default under any of the Loan Documents, (ii) any of the
agreements, terms or conditions contained in any of the Loan Documents, (iii)
any rights or remedies of the Administrative Agent or any Lender with respect
to the Loan Documents, or (iv) the rights of the Administrative Agent or any
Lender to collect the full amounts owing to them under the Loan Documents.


(c)           Each of the
Borrower, the Guarantors, Administrative Agent, and Lenders does hereby adopt,
ratify, and confirm the Credit Agreement, as amended hereby, and acknowledges
and agrees that the Credit Agreement, as amended hereby, is and remains in full
force and effect, and the Borrower and the Guarantors acknowledge and agree
that their respective liabilities and obligations under the Credit Agreement,
as amended hereby, and the Guaranty, are not impaired in any respect by this
Agreement.


(d)           From and after the
Effective Date, all references to the Credit Agreement and the Loan Documents
shall mean such Credit Agreement and such Loan Documents as amended by this
Agreement.


(e)           This Agreement is a
Loan Document for the purposes of the provisions of the other Loan
Documents.  Without limiting the
foregoing, any breach of representations, warranties, and covenants under this
Agreement shall be a Default or Event of Default, as applicable, under the
Credit Agreement.


Section 10.            Reaffirmation of the Guaranty.  Each Guarantor hereby ratifies, confirms,
acknowledges and agrees that its obligations under the Guaranty are in full
force and effect and that such Guarantor continues to unconditionally and
irrevocably guarantee the full and punctual payment, when due, whether at
stated maturity or earlier by acceleration or otherwise, all of the Guaranteed
Obligations (as defined in the Guaranty), as such Guaranteed Obligations may
have been amended by this Agreement, and its execution and delivery of this
Agreement does not indicate or establish an approval or consent requirement by
such Guarantor under the Guaranty in connection with the execution and delivery
of amendments, consents or waivers to the Credit Agreement, the Notes or any of
the other Loan Documents.


Section 11.            Counterparts.  This Agreement may be signed in any number of
counterparts, each of which shall be an original and all of which, taken
together, constitute a single instrument. 
This Agreement may be executed by facsimile signature and all such
signatures shall be effective as originals.


Section 12.            Successors
and Assigns.  This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns permitted pursuant to the Credit
Agreement.



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Section 13.            Invalidity.  In the event that any one or more of the
provisions contained in this Agreement shall for any reason be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement.


Section 14.            Governing
Law.  This
Agreement shall be deemed to be a contract made under and shall be governed by
and construed in accordance with the laws of the State of Texas.


Section 15.            Entire
Agreement.  THIS AGREEMENT, THE CREDIT AGREEMENT AS AMENDED BY THIS AGREEMENT, THE NOTES,
AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE
PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY
PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO.


THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


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EXECUTED effective as of the date first above written.


	
  BORROWER:

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey
  Johnson

  
	
   

  	
   

  	
  Chairman and
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  GUARANTORS:

  	
  SQUARE ONE ENERGY, INC.

  
	
   

  	
  LADDER COMPANIES, INC.

  
	
   

  	
  W.O. ENERGY OF NEVADA, INC.

  
	
   

  	
  WO ENERGY, INC.

  
	
   

  	
  PANTWIST, LLC

  
	
   

  	
  CANO PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Each by:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey
  Johnson

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. OPERATING COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey
  Johnson

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. PRODUCTION COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey
  Johnson

  
	
   

  	
   

  	
  President

  
					



 











 


	
  ADMINISTRATIVE AGENT/

  	
   

  	
   

  
	
  ISSUING LENDER:

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kimberly Coil

  
	
   

  	
   

  	
  Kimberly Coil

  
	
   

  	
   

  	
  Vice President

  
	
  LENDERS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  $68,750,000.00

  	
  UNION BANK OF CALIFORNIA, N.A.,

  
	
   

  	
  as a Lender and Assignor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kimberly Coil

  
	
   

  	
   

  	
  Kimberly Coil

  
	
   

  	
   

  	
  Vice President

  



 











 


	
  

  	
   

  	
   

  
	
  $31, 250,000.00 

  	
  NATIXIS (formerly known as Natexis Banques Populaires)
  as a Lender and Assignee 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Donovan C. Broussard

  
	
   

  	
  Name:

  	
  Donovan C. Broussard

  
	
   

  	
  Title:

  	
  Managing Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Louis P. Laville, III

  
	
   

  	
  Name:

  	
  Louis P. Laville, III

  
	
   

  	
  Title:

  	
  Managing Director