**EXHIBIT10.10**

 

**AMENDMENT NO. 9 AND AGREEMENT**

 

This AMENDMENT NO. 9 AND AGREEMENT (“Agreement”) entered into and madeeffective as of March 17, 2008 (“Effective Date”) is among Cano Petroleum, Inc.,a Delaware corporation (“Borrower”), the Guarantors (as defined below), theLenders (as defined below), and Union Bank of California, N.A., asadministrative agent for such Lenders (in such capacity, the “AdministrativeAgent”) and as issuing lender (in such capacity, the “Issuing Lender”).

 

**RECITALS**

 

A.            The Borrower isparty to that certain Credit Agreement dated as of November 29, 2005, asheretofore amended (as so amended, the “Credit Agreement”) among the Borrower,the lenders party thereto from time to time (the “Lenders”), the AdministrativeAgent, and the Issuing Lender.

 

B.            The Borrower proposes to enter into aSubordinated Credit Agreement dated the date hereof (“Subordinated CreditAgreement”) among the Borrower, UnionBanCal Equities, Inc. asadministrative agent (“Subordinated Agent”) and the lenders partythereto from time to time (the “Subordinated Lenders”) pursuant to whichthe Subordinated Lenders propose to make a single advance term loan in anaggregate amount equal to $15,000,000 (the “Subordinated Loan”) theproceeds of which will be used by the Borrower to prepay a portion of theoutstanding Advances under the Credit Agreement.

 

C.            The Subordinated Lenders are not willing tomake the Subordinated Loan unless the Borrower’s obligations with respectthereto and such other obligations arising under or pursuant to theSubordinated Credit Agreement are secured by a junior Lien encumbering theCollateral (“Subordinated Lien”) and guaranteed by the Guarantors undera subordinated guaranty (“Subordinated Guaranty”).

 

D.            Such Subordinated Loan, Subordinated Lien andSubordinated Guaranty are not permitted under the terms of the Credit Agreementbut the Lenders are willing to consent thereto, subject to the terms hereof,and provided that the Subordinated Lenders are willing to enter into thatcertain Subordination and Intercreditor Agreement to be dated the date hereofwhich shall have terms satisfactory to the Administrative Agent and the Lenders(“Subordination and Intercreditor”) pursuant to which such SubordinatedLoan, Subordinated Lien and Subordinated Guaranty will be subordinated to theObligations, the Liens granted to the Administrative Agent under the SecurityInstruments and the Guaranties, respectively.

 

E.             The parties hereto wish to, subject to theterms and conditions set forth herein, amend certain provisions of the CreditAgreement in order to permit the Borrower to incur the Subordinated Loan, togrant the Subordinated Lien and for the Guarantors to provide the SubordinatedGuaranty and to make certain other revisions to the terms thereof.

 

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

 

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**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.

 

**Section 3.****        ****Amendments to Credit Agreement****.**

 

(a)      Section 1.01 of theCredit Agreement is hereby amended by adding the following new defined terms inalphabetical order:

 

*“Subordinated Agent” meansUnionBanCal Equities Inc., or such other Subordinated Lender serving in thecapacity as the “subordinated agent” under the Subordinated Credit Agreement tothe extent permitted under the Subordinated Credit Agreement and theSubordination and Intercreditor Agreement.*

 

*“Subordinated Credit Agreement”means the Subordinated Credit Agreement dated as of March 17, 2008 amongthe Borrower, the Subordinated Agent and the Subordinated Lenders, as amended,restated, supplemented or otherwise modified but only to the extent permittedunder the terms of the Subordination and Intercreditor Agreement.*

 

*“Subordinated Debt” meansthe “Obligations” as defined in the Subordinated Credit Agreement.*

 

*“Subordinated Debt MaturityDate” means the “Maturity Date” as defined in the Subordinated CreditAgreement.*

 

*“Subordinated Lenders”means the lenders party to the Subordinated Credit Agreement from time to time.*

 

*“Subordinated Loan Documents”means the Subordinated Credit Agreement, the promissory notes executed anddelivered pursuant to the Subordinated Credit Agreement, and each otheragreement, instrument, or document executed by the Borrower or any of itsSubsidiaries or any of their Responsible Officers in connection with theSubordinated Credit Agreement.*

 

*“Subordination andIntercreditor Agreement” means that certain Subordination and IntercreditorAgreement, which shall be in a form acceptable to the Administrative Agent*

 

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*and the Lenders, dated as of March 17,2008 among the Administrative Agent, the Borrower, the Guarantors, the Lenders,the Subordinated Agent and the Subordinated Lenders.*

 

(b)      Section 1.01 of theCredit Agreement is hereby amended by deleting the defined term “*Loan Documents*” in its entirety and replacing it with thefollowing:

 

*“Loan Documents” meansthis Agreement, the Notes, the Letter of Credit Documents, the Guaranties, theSecurity Instruments, the Collateral Trust and Intercreditor Agreement, andeach other agreement, instrument, or document executed by the Borrower, anyGuarantor, or any of the Borrower’s or a Guarantor’s Subsidiaries or any oftheir officers at any time in connection with this Agreement.*

 

(c)      Section 5.06 of theCredit Agreement is hereby amended by re-lettering clause (p) therein asclause (q) and adding the following new clause (p) to appear abovesuch clause:

 

*(p)**         **USA Patriot Act**.  Promptly, following a request by any Lender,all documentation and other information that such Lender reasonably requests inorder to comply with its ongoing obligations under applicable “know yourcustomer” and anti-money laundering rules and regulations, including theUSA Patriot Act; and*

 

(d)      Section 4.14(a) ofthe Credit Agreement is hereby amended by replacing the first sentence thereinwith the following:

 

*Otherthan those identified on Schedule 4.14(a), neither the Borrower nor anyGuarantor is a party to any indenture, loan, or credit agreement or any leaseor other agreement or instrument or subject to any charter or corporaterestriction or provision of applicable law or governmental regulation thatcould reasonably be expected to cause a Material Adverse Change.*

 

(e)      Section 5.12 of theCredit Agreement is hereby replaced in its entirety with the following:

 

*Section 5.12**   **HedgingArrangements**.  TheBorrower shall maintain (a) each Hydrocarbon Hedge Agreement that is inplace as of the effective date of the Amendment No. 5 and Agreement whichamends this Agreement until the stated maturity of such Hydrocarbon HedgeAgreement and (b)  Hydrocarbon Hedge Agreements covering no less than 50%and no more than 85% of the production volumes attributable to “proved,developed and producing” Proven Reserves of the Borrower’s and its Subsidiaries’Oil and Gas Properties for a minimum period of at least three years as of theend of December 31, 2006 and as of the end of each six month period endingthereafter, and at a minimum price floor as required by the Majority Lendersfrom time to time.*

 

(f)       Section 6.01 of theCredit Agreement is hereby amended by replacing clause (a) therein in itsentirety with the following:

 

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*(a)**         **Liens securing the Obligationsand Liens securing the Subordinated Debt to the extent permitted under theSubordination and Intercreditor Agreement;*

 

(g)      Section 6.02 of theCredit Agreement is hereby amended by replacing clause (b) therein in itsentirety with the following:

 

*(b)**         **the Subordinated Debt.*

 

(h)      Section 6.03 of theCredit Agreement is hereby replaced in its entirety with the following:

 

*Section 6.03**   **AgreementsRestricting Liens and Distributions**. The Borrower shall not, nor shall it permit any of its Subsidiaries to,create, incur, assume or permit to exist any contract, agreement orunderstanding (other than this Agreement, the Security Instruments or theSubordinated Loan Documents) which in any way prohibits or restricts thegranting, conveying, creation or imposition of any Lien on any of its Property,whether now owned or hereafter acquired, to secure the Obligations or restrictsany Subsidiary from paying dividends to the Borrower, or which requires theconsent of or notice to other Persons in connection therewith.*

 

(i)       Section 6.14 of theCredit Agreement is hereby replaced in its entirety with the following:

* *

*Section 6.14**   **Limitationon Speculative Hedging**.  Other thanthe Hedge Contracts required to be entered into and maintained pursuant to Section 5.12hereof, the Borrower shall not, nor shall it permit any of its Subsidiaries to,(a) purchase, assume, or hold a speculative position in any commoditiesmarket or futures market or enter into any Hydrocarbon Hedge Agreement,Interest Hedge Agreement or similar hedge arrangement for speculative purposes,or (b) be party to or otherwise enter into any Hedge Contract which (i) isentered into for reasons other than as a part of its normal business operationsas a risk management strategy and/or hedge against changes resulting frommarket conditions related to the Borrower’s operations, (ii) coversnotional volumes in excess of 85% of the anticipated production volumesattributable to Proven Reserves of the Borrower and its Subsidiaries during theperiod such hedge arrangement is in effect, or (iii) is longer than threeyears in duration.*

 

(j)       Section 6.20 of theCredit Agreement is hereby replaced in its entirety with the following:

* *

*Section 6.20**   **SubordinatedDebt**.  Except as otherwise permittedby the terms of the Subordination and Intercreditor Agreement, neither theBorrower nor any of its Subsidiaries shall (b) make any optional,mandatory or scheduled payments on account of principal (whether by redemption,purchase, retirement, defeasance, set-off or otherwise), interest, premiums andfees in respect of the Subordinated Debt, or (b) amend, supplement orotherwise modify the terms of the Subordinated Debt.*

 

(k)      Section 7.02 of theCredit Agreement is hereby amended by replacing clause (q) and clause (r) intheir entirety with the following:

 

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*(q)**         **Subordinated Credit Agreement**.  An “Event of Default” under the SubordinatedCredit Agreement shall have occurred.*

* *

*(r)**          **Subordinationand Intercreditor Agreement**. The subordination provisions of the Subordination and IntercreditorAgreement shall be invalidated or otherwise cease to be in full force andeffect.*

 

(l)       Section 7.06 of theCredit Agreement is hereby amended by replacing clause (c) in its entiretywith the following:

* *

*(c)**          **Third,the remainder, if any, to the Subordinated Agent as required under theSubordination and Intercreditor Agreement and if such Subordination andIntercreditor Agreement has been terminated, then to the Borrower, itsSubsidiaries, their respective successors or assigns, or such other Person asmay be lawfully entitled to receive the same or as a court of competentjurisdiction may direct.*

 

(m)     Section 9.01 of theCredit Agreement is hereby amended by replacing clause (k) in its entiretywith the following:

* *

*(k)**         **amend or waive any provision of,nor consent to any departure by any party thereto from, the Subordination andIntercreditor Agreement,*

 

(n)      Schedule 4.07 which isattached to the Credit Agreement is hereby replaced in its entirety with theSchedule 4.07 attached to this Agreement.

 

(o)      Schedule 4.14(a) attachedto this Agreement is hereby added to the Credit Agreement as a new Schedule4.14(a).

 

**Section 4.****        ****MandatoryPrepayment****.**  The Borrower shall prepay the outstandingAdvances under the Credit Agreement with proceeds from the Subordinated Loanmade by the Subordinated Lenders on the date hereof, together with accruedinterest on the principal amount prepaid and amounts, if any, required tobe paid pursuant to Section 2.12  ofthe Credit Agreement as a result of such prepayment being made on the datehereof.  The failure to comply with this Section 4shall be an immediate Event of Default under the Credit Agreement.

 

**Section 5.****        ****Subordinationand Intercreditor Agreement****.**  The Administrative Agent is hereby authorizedon behalf of the Lenders for the Lenders and its Affiliates that are SwapCounterparties to enter into the Subordination and IntercreditorAgreement.  A copy of such Subordinationand Intercreditor Agreement will be made available to each Secured Party on theEffective Date and thereafter upon request. Each Lender and each Swap Counterparty (by receiving the benefitsthereunder and of the Collateral) acknowledges and agrees to the terms of suchSubordination and Intercreditor Agreement and agrees that the terms thereofshall be binding on such Secured Party and its successors and assigns, as if itwere a party thereto.

 

**Section 6.****        ****Copiesof Subordinated Loan Documents****.**  As requested by the Administrative Agent, theBorrower shall deliver copies of the Subordinated Credit Agreement and eachother agreement, instrument, or document executed by the Borrower or any of its

 

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Subsidiariesor any of their Responsible Officers at any time in connection with theSubordinated Credit Agreement to the Administrative Agent.

 

**Section 7.****        ****Borrower Representations and Warranties****.**  The Borrower represents and warrants that: (a) aftergiving effect to this Agreement, the representations and warranties containedin the Credit Agreement and the representations and warranties contained in theother Loan Documents are true and correct in all material respects on and as ofthe Effective Date as if made on as and as of such date except to the extentthat any such representation or warranty expressly relates solely to an earlierdate, in which case such representation or warranty is true and correct in allmaterial respects as of such earlier date; (b) after giving effect to thisAgreement, no Default has occurred and is continuing; (c) the execution, delivery and performance ofthis Agreement are within the corporate power and authority of the Borrower andhave been duly authorized by appropriate corporate and governing action andproceedings; (d) this Agreement constitutes the legal, valid, and bindingobligation of the Borrower enforceable in accordance with its terms, except aslimited by applicable bankruptcy, insolvency, reorganization, moratorium, orsimilar laws affecting the rights of creditors generally and general principlesof 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) theLiens under the Security Instruments are valid and subsisting and secureBorrower’s obligations under the Loan Documents.

 

**Section 8.****        ****Guarantors Representations and Warranties****.**  Each Guarantor represents and warrants that: (a) aftergiving effect to this Agreement, the representations and warranties containedin the Guaranty and the representations and warranties contained in the otherLoan Documents 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 thatany such representation or warranty expressly relates solely to an earlierdate, in which case such representation or warranty is true and correct in allmaterial respects as of such earlier date; (b) after giving effect to thisAgreement, no Default has occurred and is continuing; (c) the execution,delivery and performance of this Agreement are within the corporate, limitedliability company, or partnership power and authority of such Guarantor andhave been duly authorized by appropriate corporate, limited liability company,or partnership action and proceedings; (d) this Agreement constitutes thelegal, 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 theenforcement of the Guaranty; and (g) the Liens under the SecurityInstruments are valid and subsisting and secure such Guarantor’s and theBorrower’s obligations under the Loan Documents.

 

**Section 9.****        ****Conditions to Effectiveness****.**  This Agreement and theamendments to the Credit Agreement provided herein shall become effective onthe Effective Date and enforceable against the parties hereto upon theoccurrence of the following conditions precedent:

 

(a)           The Administrative Agentshall have received multiple original counterparts, as requested by theAdministrative Agent, of (i) this Agreement duly and validly 

 

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executed and delivered byduly authorized officers of the Borrower, the Guarantors, the AdministrativeAgent, and the Lenders, and (ii) the Subordination and IntercreditorAgreement duly and validly executed and delivered by the authorized officers ofthe Administrative Agent, the Lenders, the Subordinated Agent, the SubordinatedLenders, the Borrower and the Guarantors.

 

(b)           No Default shall haveoccurred and be continuing as of the Effective Date.

 

(c)           The representations andwarranties in this Agreement shall be true and correct in all materialrespects.

 

(d)           The Borrower shall have paid allfees and expenses of the Administrative Agent’s outside legal counsel and otherconsultants pursuant to all invoices presented for payment on or prior to theEffective Date.

 

(e)           The Administrative AgentBorrower shall have received evidence satisfactory to it that concurrently withthe entering into this Agreement, the Borrower shall have entered into theSubordinated Credit Agreement, the terms and conditions thereof shall be reasonably satisfactory to theAdministrative Agent and the Lenders and the conditions precedent set forth in Section 3.01of the Subordinated Credit Agreement shall have been satisfied or waived inwriting.

 

**Section 10.****     ****Acknowledgments and Agreements****.**

 

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

 

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

 

(c)      Each of the Borrower, theGuarantors, Administrative Agent, and Lenders does hereby adopt, ratify, andconfirm the Credit Agreement, as amended hereby, and acknowledges and agreesthat the Credit Agreement, as amended hereby, is and remains in full force andeffect, and the Borrower and the Guarantors acknowledge and agree that theirrespective liabilities and obligations under the Credit Agreement, as amendedhereby, and the Guaranty, are not impaired in any respect by this Agreement.

 

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

 

(e)      This Agreement is a LoanDocument for the purposes of the provisions of the other Loan Documents.  Without limiting the foregoing, any breach ofrepresentations, 

 

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warranties, and covenantsunder this Agreement shall be a Default or Event of Default, as applicable,under the Credit Agreement.

 

**Section 11.****     ****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 12.****     ****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 13.****     ****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 14.****     ****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 15.****     ****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 16.****     ****Entire Agreement****.** THIS AGREEMENT, THE CREDIT AGREEMENT ASAMENDED BY THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS CONSTITUTETHE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECTMATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECTTHERETO.

 

**THERE ARE NO UNWRITTENORAL AGREEMENTS AMONG THE PARTIES.**

 

**[SIGNATURES BEGIN ON NEXTPAGE]**

 

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EXECUTED effective as of thedate first above written.

 
| BORROWER:       | **CANO  PETROLEUM, INC.**                      |
|-----------------|------------------------------------------------|
|            |                                           |
|            |                                           |
|            | By:                                            |  /s/  Morris B. Smith |
|            |                                           | Morris B. Smith, |
|            |                                           | Senior Vice President and |
|            |                                           | Chief Financial 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/  Morris B. Smith |
|            |                                           | Morris B. Smith, |
|            |                                           | Vice President and |
|            |                                           | Chief Financial Officer |
|            |                                           |
| ** **      | **W.O.  OPERATING COMPANY, LTD.**              |
|            | By:  WO Energy, Inc., its general partner |
|            |                                           |
|            | By:                                            | /s/  Morris B. Smith |
|            |                                           | Morris B. Smith, |
|            |                                           | Vice President and |
|            |                                           | Chief Financial Officer |
|            |                                           |
| ** **      | **W.O.  PRODUCTION COMPANY, LTD.**             |
|            | By:  WO Energy, Inc., its general partner |
|            |                                           |
|            | By:                                            | /s/  Morris B. Smith |
|            |                                           | Morris B. Smith, |
|            |                                           | Vice President and |
|            |                                           | Chief Financial Officer |
|                 |                                                |  |  |

 

 

Signature Page to Amendment No. 9 and Agreement

 

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| **ADMINISTRATIVE AGENT/**  |                                 |
|----------------------------|--------------------------------------|
| **ISSUING LENDER/LENDER:** | **UNION  BANK OF CALIFORNIA, N.A.,** |
| ** **                 | ** **                           |
|                       |                                 |
|                       | By:                                  | /s/  Randall Osterberg |
|                       |                                 | Randall Osterberg |
|                       |                                 | Senior Vice President |

 

 

Signature Page to Amendment No. 9 and Agreement

 

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|   | **NATIXIS,**as a Lender |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | By:                     | /s/  Donovan C. Broussard |
|   | Name:                   | Donovan  C. Broussard |
|   | Title:                  | Managing  Director |
|   |                    |
|   |                    |
|   | By:                     | /s/  Liana Tchernysheva |
|   | Name:                   | Liana  Tchernysheva |
|   | Title:                  | Director |
|        |                         |  |  |  |  |

 

 

Signature Page to Amendment No. 9 and Agreement

 

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Schedule 4.07

 

**Burnett:**

 

OnMarch 23, 2006, the following lawsuit was filed in the 100th JudicialDistrict Court in Carson County, Texas; Cause No. 9840, The Tom L. andAnne Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne BurnettWindfohr; and Burnett Ranches, Ltd. v. Cano Petroleum, Inc., W.O.Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.  The plaintiffs claim that the electricalwiring and equipment of Cano or certain of its subsidiaries relating to oil andgas operations started a wildfire that began on March 12, 2006 in CarsonCounty.  The owner of the remainder ofthe mineral estate, Texas Christian University, has intervened in the suit joiningthe plaintiffs’ request to terminate certain oil and natural gas leases.

 

Theplaintiffs in the above action (i) allege negligence and (ii) seekdamages, including, but not limited to, damages for damage to their land andlivestock, certain expenses related to fighting the fire and certain remedialexpenses totaling approximately $1.7 million to $1.8 million.  In addition, the plaintiffs seek (i) terminationof certain oil and natural gas leases, (ii) reimbursement for theirattorney’s fees (in the amount of at least $549,000) and (iii) exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or a general partnership or de facto partnership.

 

OnJune 21, 2007, the Judge of the 100th Judicial District Court issued a FinalJudgment (a) granting motions for summary judgment in favor of Cano andcertain of its subsidiaries on plaintiffs’ claims for (i) breach ofcontract/termination of an oil and gas lease; and (ii) negligence; and (b) grantingthe plaintiffs’ no-evidence motion for summary judgment on contributorynegligence, assumption of risk, repudiation and estoppel affirmative defensesasserted by Cano and certain of its subsidiaries.  The Final Judgment has been appealed.

 

**Adcock:**

 

OnApril 28, 2006, the following lawsuit was filed in the 31stJudicial District Court of Roberts County, Texas, Cause No. 1922, Robertand Glenda Adcock, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd, and WO Energy, Inc. (“Adcock”).  There are 47 plaintiffs and three groups ofintervenors that claim that the electrical wiring and equipment of Cano orcertain of its subsidiaries relating to oil and gas operations started awildfire that began on March 12, 2006 in Carson County.

 

Theplaintiffs and intervenors (i) allege negligence, res ipsa loquitor,trespass and nuisance and (ii) seek damages, including, but not limitedto, damages to their land, buildings and livestock and certain remedial expensestotaling $11,297,684.  In addition, theplaintiffs and intervenors seek (i) reimbursement for their attorney’sfees and (ii) exemplary damages. The plaintiffs also claim that Cano and its subsidiaries are jointly andseverally liable as a single business enterprise and/or a general partnershipor de facto partnership.  On August 28,2007, one of the intervenors, Travelers Lloyds Insurance Company, filed aNotice of Nonsuit requesting the court to sign an order dismissing its claims,which seek approximately $367,627 of total damages, without prejudice.   The Court granted the Nonsuit on September 12,2007.

 

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OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. OperatingCompany, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Adcock case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 31st District Court until the 200th District Court resolves allpretrial matters and remands this case to the 31st District Courtfor trial.

 

**Hutchison:**

 

OnApril 10, 2006, the following lawsuit was filed in the 31st JudicialDistrict Court of Roberts County, Texas, Cause No. 1920, Joseph CraigHutchison and Judy Hutchison v. Cano Petroleum, Inc., W.O. Energy ofNevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.(“Hutchison”).  The plaintiffsclaim that the electrical wiring and equipment of Cano or certain of its subsidiariesrelating to oil and gas operations started a wildfire that began on March 12,2006 in Carson County.  The plaintiffs (i) allegenegligence and trespass and (ii) seek damages including, but not limitedto, damages to their land and certain remedial expenses.  In addition, the plaintiffs seek exemplarydamages.

 

OnSeptember 25, 2007, the Texas Judicial Panel on MultidistrictLitigation granted the Company’s motion to transfer and transferredthis case to the Honorable Paul Davis, retired judge of the 200th DistrictCourt of Travis County, Texas.  No further action will be taken in the31st District Court until the 200th District Court resolves all pretrialmatters and remands this case to the 31st District Court for trial.

 

OnOctober 3, 2007, Firstbank Southwest, as Trustee for the John and EddaleeHaggard Trust, intervened in the consolidated case in the 200th District Courtof Travis County, Texas as part of the Hutchinson case.  The intervenorclaims that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County. The intervenor (i) alleges negligence and (ii) seeks damages,including, but not limited to, damages to its land and certain remedialexpenses.  In addition, the intervenorseeks exemplary damages.

 

**Chisum:**

 

OnMay 1, 2006, the following lawsuit was filed in the 31st Judicial DistrictCourt of Roberts County, Texas, Cause No. 1923, Chisum FamilyPartnership, Ltd. v. Cano, W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc. (“Chisum”).  The plaintiff claims that the electricalwiring and equipment of Cano or certain of its subsidiaries relating to oil andgas operations started a wildfire that began on March 12, 2006 in CarsonCounty.  The plaintiff (i) allegesnegligence and trespass and (ii) seeks damages, including, but not limitedto, damages to its land and certain remedial expenses.  In addition, the plaintiff seeks exemplarydamages.

 

OnSeptember 25, 2007, the Texas Judicial Panel on MultidistrictLitigation granted the Company’s motion to transfer and transferredthis case to the Honorable Paul Davis, retired judge of the 200th DistrictCourt of Travis County, Texas.  No further action will be taken in the31st District Court until the 200th District Court resolves all pretrialmatters and remands this case to the 31st District Court for trial.

 

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**Martinez:**

 

OnJuly 3, 2006, the following lawsuit was filed in the 31st Judicial District Court of Roberts County, Texas, Cause No. 1928,Rebecca Lee Martinez, et al v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd., and WO Energy, Inc. (“Martinez”).  The plaintiffs claim that the electricalwiring and equipment of Cano or certain of its subsidiaries relating to oil andgas operations started a wildfire that began on March 12, 2006 in CarsonCounty, Texas.  The plaintiffs (i) allegenegligence and (ii) seek undisclosed damages for the wrongful death of tworelatives, Gerardo Villarreal and Medardo Garcia, who they claim died as aresult of the fire.  An additional heirof one of Medardo Garcia has intervened in this case alleging similar claims.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigation grantedCano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. OperatingCompany, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Martinez case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 31st District Court until the 200th District Court resolves all pretrial mattersand remands this case to the 31st District Court for trial.

 

Theplaintiffs and intervenor nonsuited this case on December 19, 2007 andrefiled in the 348th Judicial District Court of Tarrant County,Texas as part of the Valenzuela case described below.

 

**Villarreal:**

 

OnAugust 9, 2006, the following lawsuit was filed in the 233rd JudicialDistrict Court of Gray County, Texas, Yolanda Villarreal, Individually and onbehalf of the Estate of Gerardo Villarreal v. Cano Petroleum, Inc., W.O.Energy of Nevada, Inc., W. O. Operating Company, Ltd., and WO Energy, Inc.(“Villarreal”).  The plaintiffsclaim that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County, Texas. The plaintiffs (i) allegenegligence and (ii) seek undisclosed damages, including exemplary damages,for the wrongful death of Gerardo Villarreal who they claim died as a result ofthe fire.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable under vicariousliability theories.  Relatives of RobertoChavira have intervened in the case alleging similar claims regarding the deathof Roberto Chavira.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Martinez case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 233rd District Court until the 200th District Court resolves allpretrial matters and remands this case to the 233rd District Court for trial.

 

**SPS:**

 

OnMarch 14, 2007, the following lawsuit was filed in 100th Judicial DistrictCourt in Carson County, Texas; Cause No. 9994, Southwestern Public ServiceCompany d/b/a Xcel Energy v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd, and WO Energy, Inc. (“SPS”). Theplaintiff claims that the electrical wiring and equipment of Cano or

 

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certainof its subsidiaries relating to oil and gas operations started a wildfire thatbegan on March 12, 2006 in Carson County. The plaintiff (i) alleges negligence and breach of contract and (ii) seeks$1,876,000 in damages for loss and damage to transmission and distributionequipment, utility poles, lines and other equipment.  In addition, the plaintiff seeksreimbursement for its attorney’s fees.

 

OnMay 15, 2007, William L. Arrington, William M. Arrington and Mark and Le’AnnMitchell intervened in the lawsuit.  Theintervenors (i) allege negligence, res ipsa loquitor, nuisance, andtrespass and (ii) seek damages, including, but not limited to, damages totheir land, buildings and livestock and certain remedial expenses totalingapproximately $201,280.  In addition, theintervenors seek (i) reimbursement for their attorney’s fees and (ii) exemplarydamages.  The intervenors also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or as a partnership or de facto partnership.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. OperatingCompany, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the SPS case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County,Texas.  No further action will be takenin the 100th District Court until the 200th District Court resolves allpretrial matters and remands this case to the 100th District Court for trial.

 

OnJanuary 10, 2008, Philip L. Fletcher intervened in the consolidated casein the 200th District Court of Travis County, Texas as part of the SPScase.  The intervenor (i) alleges negligence, trespass and nuisanceand (ii) seeks damages, including, but not limited to, damages to hislivestock.  In addition, the intervenorseeks (i) reimbursement for his attorney’s fees and (ii) exemplarydamages.  The intervenor also claims thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or as a partnership or de facto partnership.

 

OnJanuary 15, 2008, the Jones and McMordie Ranch Partnership intervened inthe consolidated case in the 200th District Court of Travis County, Texas aspart of the SPS case.  The intervenor (i) alleges negligence,trespass and nuisance and (ii) seeks damages, including, but not limitedto, damages to its land.  In addition,the intervenor seeks exemplary damages. The intervenor also claims that Cano and its subsidiaries are jointlyand severally liable as a single business enterprise and/or as a partnership orde facto partnership.

 

**Burgess:**

 

OnMay 2, 2007, the following lawsuit was filed in the 84th Judicial District Court ofHutchinson County, Texas, Cause No. 37,619, Gary and Genia Burgess, et al.v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. (“Burgess”).  Eleven plaintiffs claim that electricalwiring and equipment relating to oil and gas operations of the Company orcertain of its subsidiaries started a wildfire that began on March 12,2006 in Carson County, Texas.  Theplaintiffs (i) allege negligence, resipsa loquitor, nuisance, and trespass and (ii) seek damages,including, but not limited to, damages to their land, buildings and livestockand certain remedial expenses totaling approximately $1,152,480.  In addition, the plaintiffs seek (i) reimbursementfor their attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and itssubsidiaries are jointly and severally liable as a single business enterpriseand/or as a partnership or de facto partnership.

 

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OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Burgess case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 84th District Court until the 200th District Court resolves all pretrialmatters and remands this case to the 84th District Court for trial.

 

**MDLCase:**

 

On September 25, 2007,the Texas Judicial Panel on Multidistrict Litigation granted CanoPetroleum, Inc., W.O. Energy of Nevada, Inc., W. O. OperatingCompany, Ltd, and WO Energy, Inc.’s Motion to Transfer Related Casesto Pretrial Court pursuant to Texas Rule of Judicial Administration13.  The Panel transferred to a singlepretrial court for consideration of pretrial matters of all pending cases (Adcock,Chisum, Hutchison, Villarreal, Martinez, SouthwesternPublic Service Company d/b/a Xcel Energy, Burgess, identified above)that assert claims against the Company and its subsidiaries related towildfires beginning on March 12, 2006.  The Panel transferred allpending cases to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  On October 19,2007, the Court entered a Case Management Order settling deadlines forcompletion of discovery in January and February of 2008 and a hearingdate for summary judgment motions on April 14, 2008.

 

On December 19, 2007,the plaintiffs and intervenor in the Martinez case nonsuited their claims inthe MDL Case.

 

**Valenzuela:**

 

On December 18, 2007,the following lawsuit was filed in the 348th Judicial District Court of Tarrant County,Texas, Cause No. 348-227907-07, Norma Valenzuela, et al. v. Cano Petroleum, Inc.,W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc.(“Valenzuela”).  Six plaintiffs,including the two plaintiffs and intervenor from the nonsuited Martinez case, claim that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and(ii) seek undisclosed damages for the wrongful death of four relatives,Manuel Dominguez, Roberto Chavira, Gerardo Villarreal and Medardo Garcia, whothey claim died as a result of the fire. In addition, plaintiffs seek (i) reimbursement for their attorney’sfees and (ii) exemplary damages. The plaintiffs also claim that Cano and its subsidiaries are jointly andseverally liable as a single business enterprise and/or as a partnership or defacto partnership.  Cano and itssubsidiaries filed a Motion to Dismiss or, in the Alternative, to TransferVenue and a Notice of Tag Along transferring the case to the MDL Case in the200th Judicial District Court of Travis County,Texas.

 

**AbrahamEquine:**

 

On February 11, 2008,the following lawsuit was filed in the 48th Judicial District Court of Tarrant County,Texas, Cause No.048-228763-08, Abraham Equine, Inc. v. Cano Petroleum, Inc., W.O.Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc.(“Abraham Equine”).  The plaintiffclaims that the electrical wiring and equipmentof Cano or

 

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certain ofits subsidiaries relating to oil and gas operations started a wildfire thatbegan on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence,trespass and nuisance and (ii) seeks damages, including, but not limitedto, damages to its land, livestock and lost profits.  In addition, the plaintiff seeks (i) reimbursementfor its attorney’s fees and (ii) exemplary damages.  The plaintiff also claims that Cano and itssubsidiaries are jointly and severally liable as a single business enterpriseand/or a general partnership or de facto partnership.  Cano and its subsidiaries filed a Motion toDismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Alongtransferring the case to the MDL Case in the 200th Judicial District Court of Travis County,Texas.

 

**Pfeffer:**

 

On March 10, 2008, thefollowing lawsuit was filed in the 352nd Judicial District Court ofTarrant County, Texas, Cause No. 352-229256-08, Gary Pfeffer v. CanoPetroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. (“Pfeffer”).  Cano and its subsidiaries have not yet beenserved with the lawsuit.  The plaintiff claims that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence,trespass and nuisance, (ii) seeks undisclosed damages for the wrongfuldeath of his father, Bill W. Pfeffer, who he claims died as a result of thefire and (iii) seeks undisclosed damages, including, but not limited to,damages to his parents’ home and property. In addition, the plaintiff seeks exemplary damages.  The plaintiff also claims that Cano and its subsidiariesare jointly and severally liable as a general partnership or de factopartnership.  Cano and its subsidiarieswill file a Motion to Transfer Venue and a Notice of Tag Along transferring thecase to the MDL Case in the 200th Judicial District Court of Travis County,Texas.

 

**Ayers:**

 

On March 11, 2008, thefollowing lawsuit was filed in the 141st Judicial District Court of Tarrant County,Texas, Cause No. 141-229281-08, Pamela Ayers, et al. v. Cano Petroleum, Inc.,W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc.  Cano and its subsidiaries have not yet beenserved with the lawsuit.  The plaintiffs claim that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and(ii) seek undisclosed damages for the wrongful death of their mother,Kathy Ryan, who they claim died as a result of the fire.  In addition, the plaintiffs seek exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or general partnership or de facto partnership.  Cano and its subsidiaries will file a Motionto Transfer Venue and a Notice of Tag Along transferring the case to the MDLCase in the 200th Judicial District Court of Travis County,Texas.

 

**Travelers:**

 

On March 12, 2008, thefollowing lawsuit was filed in the 17th Judicial District Court of Tarrant County,Texas, Cause No. 017-229316-08, The Travelers Lloyds Insurance Company andTravelers Lloyds of Texas Insurance Company v. Cano Petroleum, Inc., W.O.Energy of

 

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Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. Cano and its subsidiaries have not yet been served with thelawsuit.  The plaintiffs claim that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence, res ipsa loquitor, and trespass and (ii) claimthey are subrogated to the rights of their insureds for damages to theirbuildings and building contents totaling $447,764.60.  The plaintiffs also claim that Cano and itssubsidiaries are jointly and severally liable as a single business enterpriseand/or general partnership or de facto partnership.  Cano and its subsidiaries will file a Motionto Transfer Venue and a Notice of Tag Along transferring the case to the MDLCase in the 200th Judicial District Court of Travis County,Texas.

 

**TollingAgreement:**

 

On January 29, 2008,Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. entered into a confidentialtolling agreement with two claimants, which preserved their ability to bringclaims against Cano and its subsidiaries arising out of, or related to,wildfires that allegedly began on March 12, 2006 in Carson County.

 

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Schedule 4.14(a)

 

**AGREEMENTSWHICH COULD CREATE A MATERIAL ADVERSE CHANGE**

 

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, dated November 29, 2005, including its amendments(1-9) and all associated agreements.

 

SecuritiesPurchase Agreement dated August 25, 2006 by and among Cano Petroleum, Inc.and the Buyers listed therein.

 

Certificate of Designations, Preferences and Rights of Series DConvertible Preferred Stock of Cano Petroleum, Inc. filed August 31,2006 with the Delaware Secretary of State.

 

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