**Exhibit 10.11**

 

SUPPLEMENT NO. 1 dated as of April 28, 2006 (the “Supplement”),to the Pledge Agreement dated as of November 29, 2005 (as 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 theCollateral Trust Agreement (as hereinafter defined) for the benefit of theSecured Parties (as hereinafter defined).

 

**RECITALS**

 

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

 

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

 

(ii)           thatcertain Subordinated Credit Agreement dated as of November 29, 2005 (asheretofore and hereafter may be amended, restated or otherwise modifiedfrom time to time, the “Subordinated Credit Agreement”, and togetherwith the Senior Credit Agreement, the “Master Debt Agreements”), amongthe Borrower, the lenders party thereto from time to time (the “SubordinatedLenders”), and Energy Components SPC EEP Energy Exploration and ProductionSegregated Portfolio as administrative agent for such Subordinated Lenders (insuch capacity, the “Subordinated Agent”); and

 

(iii)          those Hedge Contracts(as defined in the Senior Credit Agreement) that the Borrower or any of itsSubsidiaries may from time to time enter into one or more with a SeniorLender or one of their Affiliates (a “Swap Counterparty”, and togetherwith the Collateral Trustee, the Senior Agent, the Issuing Lender, the SeniorLenders, the Subordinated Agent, the Subordinated Lenders, the “SecuredParties”).

 

B.            In connection with theMaster Debt Agreements, the Senior Agent, the Senior Lenders, the SubordinatedLoan Agent, the Subordinated Lenders, the Collateral Trustee, the Borrower, andother parties thereto, have entered into that certain Collateral Trust andIntercreditor Agreement dated as of even date herewith (as it may beamended, restated, or otherwise modified from time to time, the “CollateralTrust Agreement”), to among other things, appoint the Collateral Trustee ascollateral trustee for all of the Secured Parties under the security documentsexecuted in connection with the Master Debt Agreements, including the PledgeAgreement, and set forth the rights and remedies of the Secured Parties withrespect thereto.

 

C.            The Borrower and theother Pledgors have entered into the Pledge Agreement in order to induce theLenders to make Advances and the Issuing Lender to issue Letters of Credit. TheBorrower, as the equity holder of a new Subsidiary that was not in existence onthe date of the Master Debt Agreements, wishes to enter into this Supplement topledge the equity interest in

 

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suchnew Subsidiary as additional Pledged Collateral. The Borrower is executing thisSupplement in accordance with the requirements of the Credit Agreement tosupplement its Pledged Collateral under the Pledge Agreement in order to inducethe Lenders to make additional Advances and the Issuing Lender to issueadditional Letters of Credit and as consideration for Advances previously madeand Letters of Credit previously issued.

 

D.            Capitalized terms usedherein and not otherwise defined herein shall have the meanings assigned tosuch terms in the Pledge Agreement and the Collateral Trust Agreement.

 

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

 

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

 

SECTION 2.           The Borrower herebyagrees that the term “Membership Interests” as used in the Pledge Agreement ishereby supplemented to include all of the interests listed in the attached Schedule 2.02(a).In furtherance of the foregoing, as security for the payment and performance infull of the Secured Obligations, the Borrower does hereby create and grant tothe Collateral Trustee, its successors and assigns, for the benefit of theSecured Parties, their successors and assigns, a continuing security interestin and lien on all of the Borrower’s right, title and interest in and to thePledged Collateral (as defined in the Pledge Agreement and as supplemented andamended hereby) of the Borrower.

 

SECTION 3.           The Borrower representsand warrants to the Collateral Trustee and the other Secured Parties that this Supplementhas been duly authorized, executed and delivered by it and constitutes itslegal, valid and binding obligation, enforceable against it in accordance withits 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 atlaw)).

 

SECTION 4.           This Supplement may beexecuted in counterparts, each of which shall constitute an original, but allof which when taken together shall constitute a single contract. ThisSupplement shall become effective when the Collateral Trustee shall havereceived counterparts of this Supplement that, when taken together, bear thesignatures of the Pledgors and the Collateral Trustee. Delivery of an executedsignature page to this Supplement by facsimile transmission shall be aseffective as delivery of a manually signed counterpart of this Supplement.

 

SECTION 5.           Each Pledgor herebyrepresents 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 itsMembership Interests, Partnership Interests and Pledged Shares, as each term isdefined in the Pledge Agreement, and (b) set forth on Schedule 3attached hereto are its respective sole jurisdiction of formation, type oforganization, its federal tax identification number and the

 

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organizationalnumber, and all names used by it during the last five years prior to the dateof this Supplement.

 

SECTION 6.           Except as expresslysupplemented hereby, the Pledge Agreement shall remain in full force andeffect.

 

SECTION 7.           THIS SUPPLEMENT SHALLBE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THESTATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THESECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANYPARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHERTHAN THE STATE OF TEXAS.

 

SECTION 8.           In case any one or moreof the provisions contained in this Supplement should be held invalid, illegalor unenforceable in any respect, neither party hereto shall be required tocomply with such provision for so long as such provision is held to be invalid,illegal or unenforceable, but the validity, legality and enforceability of theremaining provisions contained herein and in the Pledge Agreement shall not inany way be affected or impaired. The parties hereto shall endeavor ingood-faith negotiations to replace the invalid, illegal or unenforceableprovisions with valid provisions the economic effect of which comes as close aspossible to that of the invalid, illegal or unenforceable provisions.

 

SECTION 9.           All communications andnotices hereunder shall be in writing and given as provided in the PledgeAgreement.

 

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

 

**THIS SUPPLEMENT, THE PLEDGEAGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE OTHER MASTER DEBT DOCUMENTSREPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONGTHE PARTIES HERETO.**

 

[SIGNATURES PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the Pledgors and theCollateral Trustee have duly executed this Supplement to the Pledge Agreementas 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 |   |
|        |                                       |  |  |  |  |  |

 

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Schedules

Supplement No. 1

to the Pledge Agreement

 

#### ***Pledged Collateral***

 

#### ***SCHEDULE 2.02(a)***

 
| **Pledgor**               | ** ** | **Issuer**    | ** ** | **Type of Membership  Interest** | ** ** | **% of Membership  Interest Owned** | ** ** |
|---------------------------|------------|---------------|------------|----------------------------------|------------|-------------------------------------|------------|
| Cano Petroleum, Inc. |       | Pantwist, LLC |       | Limited liability                |       | 100                                 | %          |

 

#### ***SCHEDULE 2.02(b)***

 
| **Pledgor**                      | ** ** | **Issuer**                    | ** ** | **Type of Partnership  Interest** | ** ** | **% of Partnership  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)***

 
| **Pledgor**                      | ** ** | **Issuer**                       | ** ** | **Type of  Shares** | ** ** | **Number  of  Shares** | ** ** | **% of Shares  Owned** | ** ** | **Certificate  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                    |       |

 

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**SCHEDULE 3**

 

**PLEDGORINFORMATION**

 
| 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.                            |

 

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