**Exhibit 10.7**

** **

**AMENDMENT NO. 2, ASSIGNMENT AND AGREEMENT**

** **

This AMENDMENT NO. 2,ASSIGNMENT AND AGREEMENT (“Agreement”) dated as of April 28, 2006 (“EffectiveDate”) is among Cano Petroleum, Inc., a Delaware corporation (“Borrower”), theGuarantors (as defined below), the Lenders (as defined below), and Union Bankof California, N.A., as administrative agent for such Lenders (in suchcapacity, the “Administrative Agent”) and as issuing lender (in such capacity,the “Issuing Lender”). 

 

**RECITALS**

** **

A.            The Borrower is party tothat certain Credit Agreement dated as of November 29, 2005, as amended by theAmendment No. 1 dated as of February 24, 2006 (as so amended, the “CreditAgreement”) among the Borrower, the lenders party thereto from time to time(the “Lenders”), the Administrative Agent, and the Issuing Lender.  

 

B.            In connection with suchCredit Agreement, Square One Energy, Inc., Ladder Companies, Inc., W.O. Energyof Nevada, Inc., WO Energy, Inc., W.O. Operating Company, Ltd, W.O. ProductionCompany, Ltd, and Pantwist, LLC (collectively, the “Guarantors” andindividually, a “Guarantor”) executed and delivered a Guaranty Agreement datedas of November 29, 2005 in favor of the Administrative Agent for the ratablebenefit of the Beneficiaries (as defined therein), as supplemented by thatcertain Supplement No. 1 dated of even date herewith made by Pantwist, LLC as anew Guarantor (as so supplemented, the “Guaranty”).

 

C.            Pantwist, LLC intends toacquire certain oil and gas assets located in the State of Texas from MyriadResources Corporation and affiliates thereof (the “Acquisition”) pursuant tothe terms of that certain Asset Purchase and Sale Agreement among MyriadResources Corporation, Westland Energy Company, and PAMTEX, a Texas generalpartnership composed of PAMTEX GP1 Ltd. and PAMTEX GP2 Ltd. as sellers, and theBorrower as the purchaser and dated April 25, 2006, as assigned from theBorrower to Pantwist, LLC (the “PSA”).

 

D.            The Borrower has requestedthat the Lenders increase the Borrowing Base (as defined in the CreditAgreement) in order to use the proceeds from loans under the Credit Agreementto fund the Acquisition.

 

E.             Inconnection with the Credit Agreement, Natexis Banques Popularies, as a Lenderunder the Credit Agreement (“Assignor”) wishes to assign a certain percentageof its rights and obligations under the Credit Agreement as a Lender to UnionBank of California, N.A., as a Lender under the Credit Agreement (“Assignee”).

 

F.             After giving effect to such assignment from theAssignor to the Assignee as provided herein, the Borrower, the Lenders andthe Administrative Agent wish to, subject to the terms and conditions of this Agreement, (1) increasethe Borrowing Base as provided herein, and (2) make certain other amendments tothe Credit Agreement as provided herein.

 

----

 

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

 

**Section 1.****             ****DefinedTerms****.**  As used inthis Agreement, each of the terms defined in the opening paragraph and theRecitals above shall have the meanings assigned to such terms therein.  Each term defined in the Credit Agreement andused herein without definition shall have the meaning assigned to such term inthe Credit Agreement, unless expressly provided to the contrary.

 

**Section 2.****             ****OtherDefinitional Provisions****.**Article, Section, Schedule,and Exhibit references are to Articles and Sections of and Schedules andExhibits 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, andotherwise 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 thisAgreement as a whole and not to any particular provision of thisAgreement.  The term “including” means “including,without limitation,”.  Paragraph headingshave been inserted in this Agreement as a matter of convenience for referenceonly and it is agreed that such paragraph headings are not a part of thisAgreement and shall not be used in the interpretation of any provision of thisAgreement.

 

**Section3.****             ****Assignment****. **Assignor hereby sells and assigns to Assignee, withoutrecourse and without representation or warranty other than as expresslyprovided herein, and the Assignee hereby purchases and assumes from Assignor,such percentage in and to all of the Assignor’s rights and obligations underthe Credit Agreement as a Lender (including, without limitation, suchpercentage interest in the Advances owing to the Assignor and the Assignor’srisk participation and funded participation in Letter of Credit Obligationsexisting as of the date hereof (prior to the effectiveness of this Agreement)that would result in the Assignor and the Assignee having the respectiveCommitments set forth next to its name on the signature page hereof.  After giving effect to the sale andassignment pursuant to this Section 3, each Lender’s respective Commitment willbe as set forth next to its name on the signature page hereof.  Assignor (i) represents and warrants that itis the legal and beneficial owner of the interest being assigned by it hereunderand that such interest is free and clear of any adverse claim; (ii) makes norepresentation or warranty and assumes no responsibility with respect to anystatements, warranties or representations made in or in connection with theCredit Agreement, the other Loan Documents or any other instrument or documentfurnished pursuant thereto or in connection therewith, or the execution,legality, validity, enforceability, genuineness, sufficiency or value of, orthe perfection or priority of any Lien created or purported to be created underor in connection with, the Credit Agreement, any of the other Loan Documents orany other instrument or document furnished pursuant thereto or in connectiontherewith; and (iii) makes no representation or warranty and assumes noresponsibility with respect to the financial condition of Borrower or any otherPerson or the performance or observance by Borrower or any other Person of anyof its respective obligations under the Credit Agreement, any of the other LoanDocuments or any other instrument or document furnished pursuant thereto or inconnection therewith.  The Assigneeagrees that it will, independently and without reliance upon the Assignor andbased on such documents and information as it shall deem appropriate at thetime,

 

2

----

 

continue to make its own credit decisions in taking ornot taking action under the Credit Agreement, any of the other Loan Documentsor any other instrument or document.

 

**Section 4.****             ****Amendments to Credit Agreement****. **

** **

(a)           Section 1.01 ofthe Credit Agreement is amended by inserting the following new definitions inalphabetical order:

 

*“Amendment No. 2” means the Amendment No. 2 and Agreement datedas of April 28, 2006 among the Borrower, the Guarantors, the Lenders, theAdministrative Agent and the Issuing Lender, which amends this Agreement.*

* *

*“Twister Oil and Gas Properties” means the Oil and GasProperties acquired by Pantwist, LLC from Myriad Resources Corporation andcertain affiliates thereof pursuant to that certain Asset**Purchase and SaleAgreement among Myriad Resources Corporation, Westland Energy Company, andPAMTEX, a Texas general partnership composed of PAMTEX GP1 Ltd. and PAMTEX GP2Ltd. as sellers, and the Borrower as the purchaser and dated April 25, 2006 andassigned by the Borrower to Pantwist, LLC.*

* *

(b)           The lastsentence of Section 2.02(a) of the Credit Agreement is deleted in its entiretyand replaced with the following:

 

*The Borrowing Base shall be determined in accordance with the standardsset forth in Section 2.02(d), is subject to periodic redetermination pursuantto Sections 2.02(b) and 2.02(c), and shall automatically reduce as set forth inSection 2.02(e).*

* *

(c)           Section 2.02 of the Credit Agreement ishereby amended by adding the following new clause (e) to the end thereof:

 

*(e)**          **Notwithstanding anything hereinto the contrary, the Borrowing Base shall automatically, and without anyrequirement or condition or notice to the Borrower (**which theBorrower hereby expressly waives**), decrease by $5,000,000  effective as of December 31, 2006.*

* *

(d)           Section 2.05 of the Credit Agreement ishereby amended by adding the following new clause (f) to the end thereof:

 

*(f)**           **Triggered Mandatory Prepayment**. If, as of a fiscal quarter end occurring after the effective date ofAmendment No. 2, and calculated pursuant to Section 6.18 hereof, the ratio ofthe Borrower’s consolidated Debt to consolidated EBITDA exceeds 3.00 to 1.00,then on or prior to the immediately following fiscal quarter end, the Borrowershall prepay the Advances or, if the Advances have been repaid in full, makedeposits into the Cash Collateral Account to provide cash collateral for theLetter of Credit Exposure, in an amount equal to the greater of (i) $20,000,000and (ii) an amount necessary to cause the ratio of the Borrower’s consolidatedDebt to consolidated EBITDA to be less than 3.00 to*

 

3

----

 

*1.00.  The prepayment requiredpursuant to this Section 2.05(f) shall be accompanied by accrued intereston the amount prepaid to the date of such prepayment and amounts, if any,required to be paid pursuant to Section 2.12 as a result of suchprepayment being made on such date.  Suchprepayment shall be applied to the Advances as determined by the AdministrativeAgent and agreed to by the Lenders in their sole discretion*.  *Oncea prepayment, together with interest and costs, as required herein, is madepursuant to this Section 2.05(f), this Section 2.05(f) shall cease to apply.*

* *

(e)           Section 4.07(a)of the Credit Agreement is hereby amended by deleting the first sentencethereof in its entirety and replacing it with the following:

 

*There is no pending or, to the best knowledge of the Borrower,threatened action or proceeding affecting the Borrower or any of the Guarantorsbefore any court, Governmental Authority or arbitrator which could reasonablybe expected to cause a Material Adverse Change other than as set forth inSchedule 4.07 or which purports to affect the legality, validity, bindingeffect or enforceability of this Agreement, any Note, or any other LoanDocument.*

* *

(f)            Section 5.06(d)of the Credit Agreement is deleted in its entirety and replaced with thefollowing:

 

*(d)**         **Production and Hedging Reports**.  As soon as available and inany event within 45 days after the end of each fiscal quarter, commencing withthe fiscal quarter ending March 31, 2006, a report certified by a ResponsibleOfficer of the Borrower in form and substance satisfactory to theAdministrative Agent prepared by the Borrower (i) covering each of the Oil andGas Properties of the Borrower and its Subsidiaries (other than the BarnettShale Properties) and detailing on a quarterly basis (A) the production,revenue, and price information and associated operating expenses for each suchquarter, (B) any changes to any producing reservoir, production equipment, orproducing well during each such quarter, which changes could cause a MaterialAdverse Change, and (C) any sales of the Borrower’s or any Subsidiaries’ Oiland Gas Properties during each such quarter (other than the Barnett ShaleProperties), (ii) setting forth a true and complete list of all Hedge Contractsof the Borrower and its Subsidiaries and detailing the material terms thereof(including the type, term, effective date, termination date and notionalamounts or volumes), the net mark to market value thereof, all credit supportagreements relating thereto (including any margin required or supplied), andthe counterparty to each such agreement, and (iii) certifying the Borrower’scompliance with Section 5.12 hereof.*

* *

(g)           Section 5.12 ofthe Credit Agreement is deleted in its entirety and replaced with thefollowing:

 

4

----

* *

*Section 5.12**        **Hedging Arrangements**.  The Borrower shall:*

 

*(a) maintain the Hydrocarbon Hedge Agreements in existence on March 31,2006 and as described in Schedule 5.12 for a minimum period of at least threeyears as of the end of December 31, 2006 and as of the end of each six monthperiod ending thereafter,*

* *

*(b) on or before 10 days following the effective date of Amendment No.2, cause Pantwist, LLC to enter into, and from and after such date, maintain(i) Hydrocarbon Hedge Agreements covering not less than 50% of the “proved,developed and producing” crude oil reserves attributable to the Twister Oil andGas Properties for a minimum period of at least three years as of the effectivedate of Amendment No. 2 and as of the end of each two fiscal quarter periodending thereafter, and at a minimum floor of $60 per Bbl, and (ii) HydrocarbonHedge Agreements covering not less than 50% of the “proved, developed andproducing” natural gas reserves attributable to the Twister Oil and GasProperties for a minimum period of at least three years as of the effectivedate of Amendment No. 2 and as of the end of each two fiscal quarter periodending thereafter, and with a weighted average contract price of $7.60 per Mcf,and*

* *

*(c) notwithstanding any of the foregoing, maintain Hydrocarbon HedgeAgreements covering no less than 50% and no more than 80% of the productionvolumes attributable to “proved, developed and producing” Proven Reserves ofthe Borrower’s and its Subsidiaries’ Oil and Gas Properties.*

* *

(h)           A new Schedule4.07 to the Credit Agreement is added as set forth in Schedule 4.07 attached tothis Agreement.

 

(i)            Schedule 4.21 to the Credit Agreement isreplaced in its entirety with the Schedule 4.21 attached to this Agreement.

 

**Section 5.****             ****Increasein the Borrowing Base**. Subject to the terms of this Agreement, the Lenders and the Borrowerhereby agree that as of the Effective Date the Borrowing Base shall be$55,000,000 and such Borrowing Base shall remain in effect at that level untilthe Borrowing Base is redetermined or reduced in accordance with the CreditAgreement, as amended hereby.

 

**Section 6.****             ****Borrower Representations and Warranties****.**  The Borrower represents and warrants that:(a) the representations and warranties contained in the Credit Agreement andthe representations and warranties contained in the other Loan Documents, asamended hereby, are true and correct in all material respects on and as of theEffective Date as if made on as and as of such date except to the extent that any such representation orwarranty expressly relates solely to an earlier date, in which case suchrepresentation or warranty is true and correct in all material respects as ofsuch earlier date; (b) no Default has occurred and is continuing; (c) the execution,delivery and performance of this Agreement are within the corporate power andauthority of the Borrower and have been duly authorized by appropriatecorporate and governing action and proceedings; (d) this Agreement constitutesthe legal, valid, and binding obligation of the Borrower enforceable inaccordance with its terms, except as limited by applicable bankruptcy,insolvency, reorganization, moratorium, or similar laws affecting the rights of

 

5

----

 

creditors generally andgeneral principles of equity; (e) there are no governmental or other thirdparty consents, licenses and approvals required in connection with theexecution, delivery, performance, validity and enforceability of thisAgreement; and (f) the Liens under the Security Instruments are valid andsubsisting and secure Borrower’s obligations under the Loan Documents.

 

**Section 7.****             ****Guarantors Representations and Warranties**.  Each Guarantor represents and warrants that:(a) the representations and warranties contained in the Guaranty and therepresentations and warranties contained in the other Loan Documents, asamended hereby, are true and correct in all material respects on and as of theEffective Date as if made on as and as of such date except to the extent that any such representation orwarranty expressly relates solely to an earlier date, in which case suchrepresentation or warranty is true and correct in all material respects as ofsuch earlier date; (b) 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 Guarantorand have been duly authorized by appropriate corporate, limited liabilitycompany, or partnership action and proceedings; (d) this Agreement constitutesthe legal, valid, and binding obligation of such Guarantor enforceable inaccordance with its terms, except as limited by applicable bankruptcy,insolvency, reorganization, moratorium, or similar laws affecting the rights ofcreditors generally and general principles of equity; (e) there are nogovernmental or other third party consents, licenses and approvals required inconnection with the execution, delivery, performance, validity andenforceability of this Agreement; (f) it has no defenses to the enforcement ofthe Guaranty; and (g) the Liens under the Security Instruments are valid andsubsisting and secure such Guarantor’s and the Borrower’s obligations under theLoan Documents.

 

**Section 8.****             ****Conditions to Effectiveness****.**  This Agreement, the increasein the Borrowing Base, and the amendments to the Credit Agreement providedherein shall become effective on the Effective Date and enforceable against theparties hereto upon the occurrence of the following conditions precedent:

 

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

 

(b)           New Notes evidencing the new Commitmentsof the Lenders as a result of the assignment effected pursuant hereto.

 

(c)           The Borrower orthe respective Guarantor shall have delivered fully executed, multipleoriginals of newMortgages or supplements to existing Mortgages, in form and substanceacceptable to the Administrative Agent, and encumbering the Oil and GasProperties acquired under the Acquisition.

 

(d)           The Administrative Agentshall have received afully executed, correct and complete copy of the PSA and all other documents,agreements, instruments and amendments, if any, related thereto and certifiedas such by a duly authorized officer of the Borrower.

 

6

----

 

(e)           The Administrative Agent shall havereceived all requested lien releases, title opinions and other title duediligence material satisfactory to it evidencing the title to the Oil and GasProperties to being acquired under the PSA and which are to be considered indetermining the Borrowing Base.

 

(f)            All conditionsto the effectiveness of the Acquisition, other than the paymentof the purchase price, shall have been met pursuant to the terms of the PSA.

 

(g)           No Defaultshall have occurred and be continuing as of the Effective Date.

 

(h)           Therepresentations and warranties in this Agreement shall be true and correct inall material respects.

 

(i)            The Borrower shall have paid (i) afee in the amount of $125,000 for the pro rata account of the Lenders (aftergiving effect to the assignment provided herein) in consideration of the Borrowing Base increaseas required under Section 2.08(d) of the Credit Agreement, (ii) the feesrequired under that certain fee letter of even date herewith between theAdministrative Agent and the Borrower, and (iii) all fees and expenses of theAdministrative Agent’s outside legal counsel and other consultants pursuant toall invoices presented for payment on or prior to the Effective Date.

 

**Section 9.****             ****Acknowledgments and Agreements****. **

** **

(a)           The Borrower acknowledges that on thedate hereof all Obligations are payable without defense, offset, counterclaimor recoupment.

 

(b)           TheAdministrative Agent and the Lenders hereby expressly reserve all of theirrights, remedies, and claims under the Loan Documents.  Nothing in this Agreement shall constitute awaiver or relinquishment of (i) any Default or Event of Default under any ofthe Loan Documents, (ii) any of the agreements, terms or conditions containedin any of the Loan Documents, (iii) any rights or remedies of theAdministrative Agent or any Lender with respect to the Loan Documents, or (iv)the rights of the Administrative Agent or any Lender to collect the fullamounts owing to them under the Loan Documents.

 

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

 

(d)           From and afterthe Effective Date, all references to the Credit Agreement and the Loan Documentsshall mean such Credit Agreement and such Loan Documents as amended by thisAgreement.

 

(e)           This Agreementis a Loan Document for the purposes of the provisions of the other LoanDocuments.  Without limiting theforegoing, any breach of representations,

 

7

----

 

warranties, and covenants under this Agreement shallbe 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 fullforce and effect and that such Guarantor continues to unconditionally andirrevocably guarantee the full and punctual payment, when due, whether atstated maturity or earlier by acceleration or otherwise, all of the GuaranteedObligations (as defined in the Guaranty), as such Guaranteed Obligations mayhave been amended by this Agreement, and its execution and delivery of thisAgreement does not indicate or establish an approval or consent requirement bysuch Guarantor under the Guaranty in connection with the execution and deliveryof amendments, consents or waivers to the Credit Agreement, the Notes or any ofthe other Loan Documents.

 

**Section 11.****           ****Counterparts****.**  This Agreement may be signed in any number ofcounterparts, each of which shall be an original and all of which, takentogether, constitute a single instrument. This Agreement may be executed by facsimile signature and all suchsignatures shall be effective as originals.

 

**Section 12.****           ****Successorsand Assigns****.**  This Agreement shall be binding upon andinure to the benefit of the parties hereto and their respective successors andassigns permitted pursuant to the Credit Agreement.

 

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

 

**Section 14.****           ****GoverningLaw****.**  ThisAgreement shall be deemed to be a contract made under and shall be governed byand construed in accordance with the laws of the State of Texas.

 

**Section 15.****           ****EntireAgreement****.** THIS AGREEMENT, THE CREDIT AGREEMENT AS AMENDED BY THIS AGREEMENT, THENOTES, AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONGTHE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANYPRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO.

 

**THEREARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

** **

**[SIGNATURES BEGIN ON NEXT PAGE]**

 

8

----

 

EXECUTEDeffective as of the date first above written.

 
| **BORROWER:**   | **CANO  PETROLEUM, INC.**                 |
|-----------------|-------------------------------------------|
| ** **      | ** **                                |
| ** **      | ** **                                |
|            | By:                                       | /s/  S. Jeffrey Johnson |   |
|            | S. Jeffrey Johnson                        |
|            | Chief Executive Officer                   |
|            |                                      |
| **GUARANTORS:** | **SQUARE  ONE ENERGY, INC.**              |
| ** **      | **LADDER  COMPANIES, INC.**               |
| ** **      | **W.O.  ENERGY OF NEVADA, INC.**          |
| ** **      | **WO  ENERGY, INC.**                      |
| ** **      | **PANTWIST,  LLC**                        |
| ** **      | ** **                                |
| ** **      | ** **                                |
|            | 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                           |
|                 |                                           |  |  |  |  |

 

 

Signature Page to AmendmentNo. 2, Assignment and Agreement

 

----

 
| **ADMINISTRATIVE AGENT/** | ** **                           |
|---------------------------|--------------------------------------|
| **ISSUING LENDER:**       | **UNION  BANK OF CALIFORNIA, N.A.,** |
|                      |                                 |
|                      |                                 |
|                      | By:                                  | /s/  Kimberly Coil |   |
|                      | Kimberly Coil                        |
|                      | Vice President                       |
|                      |                                 |
|                      |                                 |
| **$81,818,181.82**        | **UNION  BANK OF CALIFORNIA, N.A.,** |
|                      | as  a Lender and as the Assignee     |
|                      |                                 |
|                      |                                 |
|                      | By:                                  | /s/  Kimberly Coil |   |
|                      | Kimberly Coil                        |
|                      | Vice President                       |

 

----

 
| **$18,181,818.18** | **NATEXIS  BANQUES POPULAIRES**  |
|--------------------|----------------------------------|
|               | as  a Lender and as the Assignor |
|               |                             |
|               |                             |
|               | By:                              | /s/ Donovan C. Broussard |   |
|               | Name:                            | Donovan C. Broussard |   |
|               | Title:                           | Vice President & Group Manager |   |
|               |                             |
|               |                             |
|               | By:                              | /s/ Louis P. Laville, III |   |
|               | Name:                            | Louis P. Laville, III |   |
|               | Title:                           | Vice President & Group Manager |   |
|                    |                                  |  |  |  |  |

 

----

 

**SCHEDULE 4.07**

** **

**LITIGATION**

** **

OnMarch 24, 2006, the Borrower and certain of the Guarantors were sued for claimsrelating to the March fires that occurred on properties operated by W.O.Operating Company, Ltd.  The case isentitled: *In the 100th JudicialDistrict Court of Carson County, Texas, Cause No. 9840, The Tom L. and AnneBurnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,George Beggs, III and Ed Hudson, Jr., as Co-Trustees; Anne Burnett Windfohr;and Burnett Ranches, Ltd., Plaintiffs, v. Cano Petroleum, Inc., W.O. Energy ofNevada, Inc.; W.O. Operating Company, Ltd. and W.O. Energy, Inc., Defendants*.

 

OnApril 13, 2006, the Borrower and certain of the Guarantors received notice thatthey were sued for claims relating to the March fires that occurred onproperties operated by W.O. Operating Company, Ltd.  As of this date, neither the Borrower nor anyof the Guarantors have been served with process in this case.  The case is entitled: *Joseph Craig Hutchison, et ux vs. Cano Petroleum,Inc., W.O. Energy of Nevada, Inc.; W.O. Operating Company, Ltd. and W.O. Energy,Inc.*  The plaintiffs’ attorneyhas also indicated that he will be adding two additional plaintiffs in thiscase, the Chisum Family Limited Partnership and the Haggard Trust.

 

----

 

**SCHEDULE 4.21**

** **

**MATERIAL AGREEMENTS**

** **

Engagement forProfessional Services by and between Cano Petroleum, Inc. and BainbridgeCapital dated April 14, 2005.

 

Gas Purchase andProcessing Agreement by and between Ladder Energy Company and ScissorTailEnergy, LLC dated September 1, 2004.

 

Gas Sales and PurchaseAgreement by and between Alliant Energy Desdemona, LP and KenMor Properties,LLC dated March 1, 2005.

 

Agreement by and betweenSquare One Energy, Inc. and KenMor Properties, LLC dated October 7, 2005 (inwhich KenMor Properties, LLC assigns, transfers and conveys to Square OneEnergy, Inc. all of its right, title and interest in and to the Gas Sales andPurchase Agreement by and between Alliant Energy Desdemona, LP and KenMorProperties, LLC dated March 1, 2005), as amended by a First Amendment toAgreement dated October 7, 2005.

 

Gas Purchase Contract byand between Ladder Energy Company and Western Gas Resources, Inc. dated January7, 1998.

 

Gas Purchase Contract byand between Square One Energy, Inc. and Newpoint Gas Services, Inc. dated April21, 2004.

 

Crude Oil Purchase Agreementby and between Ladder Energy Company and Sunoco, Inc. (R&M) dated February1, 2000, as amended by a letter agreement between Sunoco Partners Marketing& Terminals, L.P. and Ladder Energy Company dated September 12, 2005.

 

Crude Oil Purchase Agreementby and between Ladder Energy and Coffeyville Resources Crude Transportationdated October 4, 2005.

 

Natural Gas Liquid MixAgreement by and between Square One Energy, Inc. and Dufour Petroleum, L.P.dated July 1, 2004, as amended by Amendment Letter dated October 1, 2005 and asamended by Amendment Letter dated November 1, 2005.

 

Office Lease Agreement byand between Ft. Worth Plaza Limited Partnership, a Texas limited partnership,as Landlord and Cano Petroleum, Inc. (assignee of Cano Energy Corporation), asTenant, purportedly dated April 10, 2001, as amended by the FirstAmendment to Lease Agreement dated September 19, 2001.

 

Consulting Agreement byand between Cano Petroleum, Inc. and Reservoir Solutions, Inc. datedAugust 15, 2005.

 

Lignin Surfactant SystemDevelopment Agreement by and between Cano Petroleum, Inc. and ReservoirSolutions, Inc. dated July 20, 2005.

 

Stock Purchase Agreementby and between Cano Petroleum, Inc., W. O. Energy of Nevada, Inc., Miles O’Loughlinand Scott White dated November 29, 2005.

 

Employment Agreement byand between Huron Ventures, Inc. and Michael J. Ricketts dated May 28,2004.

 

Employment Agreement byand between Huron Ventures, Inc. and Thomas Cochrane dated May 28, 2004.

 

Employment Agreement byand between Cano Petroleum, Inc. and James K. Teringo, Jr. dated July 11,2005.

 

CompensationReimbursement Agreement by and between Cano Petroleum, Inc. and SabineProduction Operating, LLC dated October 31, 2005.

 

----

 

Omnibus Agreement by andbetween Cano Petroleum, Inc., Carlile Management, LLC, Haddock Enterprises, LLCand Sabine Production Partners, LP dated October 31, 2005.

 

Amended and RestatedRegulations of Sabine Production Operating, LLC executed by Cano Petroleum,Inc., Haddock Enterprises, LLC and Carlile Management, LLC, effective as ofAugust 3, 2005.

 

2005 Directors’ StockOption Plan of Cano Petroleum, Inc.

 

Gas Purchase and SalesContract by and between Arrow Oil and Gas, Inc. and STP, Inc. datedAugust 15, 2002.

 

Management Stock PoolAgreement dated May 28, 2004 among Huron Ventures Inc. and TheShareholders of Davenport Field Unit Inc.

 

Management Stock PoolEscrow Agreement dated May 28, 2004 by and among Huron Ventures Inc. andS. Jeffrey Johnson, et al.

 

Purchase and SaleAgreement dated August 16, 2004, by and between Cano Energy Corporation andCano Petroleum, Inc.

 

Purchase and SaleAgreement dated September 2, 2004, by and between Nowata Oil Properties LLC andCano Petroleum, Inc.

 

Purchase and SaleAgreement dated February 6, 2005, by and between Square One Energy, Inc. andCano Petroleum, Inc.

 

Subscription Agreementdated October 8, 2004 by and between Cano Petroleum, Inc. and Randall Boyd.

 

Stock Option Agreementdated December 16, 2004, between Cano Petroleum, Inc. and Gerald W. Haddock.

 

Form of SubscriptionAgreement dated March 18, 2005.

 

Letter Agreement datedMarch 29, 2005 among the Haddock Enterprises, LLC, Cano Petroleum, Inc. andKenneth Carlile.

 

Sabine ProductionPartners, LP Transaction Summary dated August 4, 2005.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and Howard HughesMedical Institute.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and The RobertWood Johnson Foundation.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and Laborers’District Council and Contractors’ of Ohio Pension Fund.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and OhioCarpenters’ Pension Fund.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and New YorkNurses Association Pension Plan.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and Public SectorPension Investment Board.

 

----

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and SpindriftInvestors (Bermuda) L.P.

 

Subscription Agreementdated September 16, 2005 by and between Cano Petroleum, Inc. and SpindriftPartners, L.P.

 

Non-Qualified StockOption Agreement dated September 16, 2005 by and between Cano Petroleum, Inc.and James K. Teringo, Jr.

 

Subscription Agreementdated September 14, 2005 by and between Cano Petroleum, Inc. and TouradjiGlobal Resources Master Fund, Ltd.

 

Subscription Agreementdated September 14, 2005 by and between Cano Petroleum, Inc. and Renaissance USGrowth Investment Trust PLC.

 

Subscription Agreementdated September 14, 2005 by and between Cano Petroleum, Inc. and BFS US SpecialOpportunities Trust PLC.

 

Subscription Agreementdated September 14, 2005 by and between Cano Petroleum, Inc. and CrestviewCapital Master, LLC.

 

Gas Purchase Contractbetween W.O. Operating Company, Ltd. and Duke Field Services LP dated November1, 2003.

 

Gas Purchase and SalesAgreement dated September 1, 1975, between Skelly Oil Company, as Seller, andPhillips Petroleum Company, as Buyer.

 

Gas Purchase Contractbetween W.O. Operating Company, as Seller, and GPM Gas Corporation, as Buyer,dated March 15, 1994.

 

Gas Purchase Contractbetween Hugoton Energy Corporation, as Seller, and GPM Gas Corporation, asBuyer, dated August 3, 1995, covering Sections 3 and 4, Block Y, M&CSurvey, Hutchinson County, Texas.

 

Crude Oil PurchaseContract between W.O. Operating Company, as Seller, and Diamond ShamrockRefining Company LP, dated August 6, 2001 (Valero is successor to DiamondShamrock on this contract).

 

Gas Purchase Contract byand between W.O. Operating Company Limited, as Seller, and OneOK Texas FieldServices LP, as Buyer, dated January 1, 2005.

 

Gas Purchase Contractbetween W.O. Operating Company, as Seller, and GPM Gas Corporation, as Buyer,dated March 15, 1995. 

 

Gas Purchase Contractdated August 3, 1995 by and between W.O. Operating Company and Duke EnergyField Services, as amended on August 1, 2005 and September 1, 2005.

 

Oil Marketing Agreementdated January 13, 1994 by and between W.O. Operating Company and Pan Mark, Inc.

 

RegistrationRights Agreement by and between Cano Petroleum, Inc. and Miles O’Loughlin datedNovember 29, 2005.

 

RegistrationRights Agreement by and between Cano Petroleum, Inc. and Scott White datedNovember 29, 2005.

 

CreditAgreement among Cano Petroleum, Inc., as Borrower, The Lenders Party Heretofrom Time to Time, as Lenders, and Union Bank of California, N.A., asAdministrative Agent and as Issuing Lender, dated November 29, 2005.

 

----

 

SubordinatedCredit Agreement among Cano Petroleum, Inc., as Borrower, The Lenders PartyHereto From Time to Time, as Lenders, and Energy Components SPC EEP EnergyExploration and Production Segregated Portfolio, as Administrative Agent, datedNovember 29, 2005.

 

GuarantyAgreement by and among Ladder Companies Inc., Square One Energy, Inc., W.O.Energy of Nevada, Inc., WO Energy, Inc., W.O. Operating Company, Ltd. and W.O.Production Company, Ltd. in favor of Union Bank of California, N.A., asAdministrative Agent, dated November 29, 2005.

 

GuarantyAgreement by and among Ladder Companies Inc., Square One Energy, Inc., W.O.Energy of Nevada, Inc., WO Energy, Inc., W.O. Operating Company, Ltd. and W.O.Production Company, Ltd. in favor of Energy Components SPC EEP EnergyExploration and Production Segregated Portfolio, as Administrative Agent, datedNovember 29, 2005.

 

EscrowAgreement by and among Cano Petroleum, Inc., Miles O’Loughlin, Scott White andThe Bank of New York Trust Company, N.A., as Escrow Agent, dated November 29,2005.

 

PledgeAgreement by and among Cano Petroleum, Inc., W.O. Energy of Nevada, Inc. and WOEnergy, Inc. in favor of Union Bank of California, N.A., as AdministrativeAgent, dated November 29, 2005.

 

SecurityAgreement by and among Cano Petroleum, Inc., Ladder Companies Inc., Square OneEnergy, Inc., W.O. Energy of Nevada, Inc., WO Energy, Inc., W.O. OperatingCompany, Ltd. and W.O. Production Company, Ltd. in favor of Union Bank ofCalifornia, N.A., as Administrative Agent, dated November 29, 2005.

 

CanoPetroleum, Inc. 2005 Long-Term Incentive Plan.

 

Formof Stock Option Agreement.

 

Summaryof terms of purchase of overriding royalty interests by Cano Petroleum, Inc.from THEprivate Energy Company, Inc. dated December 27, 2005.

 

SummarySheet:  Director Compensation.

 

EmploymentAgreement between Cano Petroleum, Inc. and S. Jeffrey Johnson effectiveJanuary 1, 2006.

 

Amendmentto Employment Agreement of Michael J. Ricketts effective January 1, 2006.

 

Amendmentto Employment Agreement of Thomas Cochrane effective January 1, 2006.

 

Amendmentto Employment Agreement of James K. Teringo, Jr. effective January 1,2006.

 

AmendmentNo. 1 dated February 24, 2006, to the $100,00,000 Credit Agreement among CanoPetroleum, Inc., as Borrower, The Lenders Party Hereto From Time to Time asLenders and Union Bank of California, N.A., as Administrative Agent and asIssuing Lender dated November 29, 2005.

 

Gas Purchase Agreementdated 5-2-90 Between Maple Gas Corporation (Buyer) and Myriad ResourcesCorporation (Seller).

 

Gas Purchase and SalesAgreement dated 2-1-74 between Phillips Petroleum Company (Buyer) and SohioPetroleum Company (Seller).

 

Gas Purchase Contractdated 11-1-87 between George A. Smith (Seller) and Westar TransmissionCompany [now Oneok Field Services] (Buyer).

 

Gas Purchase Contractdated January 14, 1998, between Myriad Resources Corporation (Seller) andGPM Gas Corporation (Buyer).

 

----

 

Gas Services and/orPurchase Agreement dated 7-20-99, by and between Myriad Resources Corporation(Owner) and Dynegy Midstream Services).

 

Gas Purchase Contractdated May 10, 1990, by and between Myriad Resources, as Seller, andPhillips 66 Natural Gas Company, as Buyer, covering Section 94,Block B-2, H&GN RR Company Survey, Gray County, Texas.

 

Gas Purchase Contractdated 10-31-95, between GPM Gas Corporation (Buyer) and Pamtex, Inc., et al(Seller).

 

Gas Purchase Contractdated 11-20-92 (Contract No. PAM0548-00R), between Rio Petroleum, Inc.(Seller) and GPM Gas Corporation (Buyer); as amended by instruments dated6-1-99, 11-2-98 and 12-16-97.

 

Gas Purchase Agreementdated March 1, 2003, by and between Oneok Texas Field Services, LP(Buyer), and Myriad Resources Corporation (Seller) covering the E/2NW/4 andW/2NE/4, Section 67, Block 4, I&GN Survey, Carson County, Texas.

 

Gas Purchase Contractdated June 23, 1994, by and between Myriad Resources Corporation, asSeller, and GPM Gas Corporation, as Buyer, covering the NE/4 Section 33,Block B-2, H&GN Survey, Gray County, Texas.

 

Casinghead Gas Contractdated February 23, 1949, by and between Danciger Oil & RefiningCompany and Phillips Petroleum Company, as amended and extended.

 

Gas Purchase Contractdated 8-13-96, between GPM Gas Corporation (Buyer) and Myriad ResourcesCorporation (Seller).  Covers Section 3,J.T. Sneed Survey.

 

Agreement datedJune 25, 1928, by and between Roxana Petroleum Corporation and DancigerOil & Refining Company of Texas covering the E 80 acres of SW/4,Section 5, Block 1, ACH&B Survey, Gray County, Texas.

 

Gas Purchase Contractdated 8-13-96, between GPM Gas Corporation (Buyer) and Myriad ResourcesCorporation (Seller).  CoversSection 3, J.T. Sneed Survey.

 

Gas Purchase Contractdated 10-1-04, between Oneok Texas Field Services, L.P. (Buyer) and Pamtex,Inc. (Seller).  /4 and the E/2 NW/4,Section 127, Block 3, I&GN RR Co. Survey.

 

Agreement datedJune 25, 1928, by and between Roxana Petroleum Corporation and DancigerOil & Refining Company of Texas covering the E 80 acres of SW/4, Section 5,Block 1, ACH&B Survey, Gray County, Texas.

 

Gas Purchase Contractdated May 10, 1990, by and between Myriad Resources, as Seller, andPhillips 66 Natural Gas Company, as Buyer, covering Section 94,Block B-2, H&GN RR Company Survey, Gray County, Texas.

 

Casinghead Gas Contractdated February 23, 1949, by and between Danciger Oil & RefiningCompany and Phillips Petroleum Company, as amended and extended.

 

Asset Purchase and SaleAgreement among Myriad Resources Corporation, Westland Energy Company, andPAMTEX, a Texas general partnership composed of PAMTEX GP1 Ltd. and PAMTEX GP2Ltd. as sellers, and the Borrower as the purchaser and dated April 25, 2006, asassigned from the Borrower to Pantwist, LLC

 

----