**Exhibit 10.4**

 

September 30, 2008

 

**Cano Petroleum, Inc.**

Burnett Plaza

801 Cherry Street

Suite 3200, Unit 25

Fort Worth, TX  76102

 

Re:                               Paymentof Prepayment Premium

 

Ladies and Gentlemen:

 

Reference is made to the Subordinated Credit Agreement dated as of March 17,2008, as hereto amended (as so amended, the “Credit Agreement”) amongCano Petroleum, Inc. (the “Borrower”), the lenders from time to time parties thereto(the “Lenders”), and UnionBanCal Equities, Inc. as AdministrativeAgent for the benefit of the Lenders (in such capacity, the “AdministrativeAgent”). Unless otherwise defined in this letter, each term used inthis letter which is defined in the Credit Agreement has the meaning assignedto such term in the Credit Agreement.

 

The Borrower has advised the Administrative Agent and the Lenders thatthe Borrower will make a voluntary prepayment in full of all outstandingprincipal, interest and fees under the Credit Agreement on September 30,2008 (“Payment Date”). Pursuant to Section 2.05 of the CreditAgreement, such prepayment of principal must be accompanied by, among otherthings, a prepayment premium equal to 2.00% of the principal amount beingprepaid. The Borrower and the Lenders acknowledge and agree that a prepaymentin full of the principal amount of the Advances on the Payment Date wouldresult in a prepayment premium equal to $300,000.00 (“Prepayment PremiumAmount”). The Borrower has requested that the Lenders accept a portion ofsuch Prepayment Premium Amount after the Payment Date. Notwithstanding anythingto the contrary contained in the Credit Agreement or in any other LoanDocument, the Lenders and the Borrower hereby agree that (a) $262,500.00of the Prepayment Premium Amount shall be paid on the Payment Date and (b) $37,500.00of the Prepayment Premium Amount shall be paid by the Borrower on or prior tothe 75th day after the Payment Date. Notwithstanding the foregoing, UnionBanCal Equities, Inc. shallwaive the installment of $37,500.00 if either (i) the Borrower and UnionBanCal Equities, Inc. enterinto and close a senior, second lien credit facility with an initial commitmentof at least $15,000,000.00 (“New Facility”) by October 31, 2008 or (ii) UnionBanCal Equities, Inc. electsnot to enter into and close the New Facility other than as a result of (A) theBorrower’s failure to meet the customary conditions precedent for the closingof the New Facility by October 31, 2008 or (B) a change, occurrence or development that hasoccurred after the date hereof or has become known to UnionBanCal Equities, Inc.after the date hereof, that is reasonably likely in the opinion of

 

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UnionBanCalEquities, Inc., to have a material adverse effect on the business,prospects, assets, liabilities, operations, or condition (financial or otherwise)of the Borrower and its subsidiaries and affiliates).

 

This letter agreement (“Agreement”) shall not be assignable bythe Borrower without the prior written consent of UnionBanCal Equities, Inc. andmay not be amended or otherwise modified except in writing executed by theBorrower and UnionBanCal Equities, Inc.This Agreement may be executed in any number of counterparts, each ofwhich shall be an original and all of which, when taken together, shallconstitute one agreement. This Agreement shall be governed by, and construed inaccordance with, the laws of the State of Texas. This Agreement is not intendedto confer any benefits upon, or create any rights in favor of, any Person otherthan the parties hereto. The existence and terms of this Agreement shall bekept confidential; provided that the terms may be disclosed (i) to such ofyour employees and affiliates, officers and directors and legal, accounting andother advisors who have a need to know such information, are informed by you ofthe confidential nature of the information, and are subject to appropriateconfidentiality restrictions, and (ii) as may be required by applicablelaw or regulations or by an order of a court or governmental agency ofcompetent jurisdiction, provided that you give us prior notice before sharingany such information pursuant to such applicable law or regulations

 
|                                  | Very truly yours,              |
|---------------------------------------|--------------------------------|
|                                  |                           |
|                                  | **UNIONBANCAL EQUITIES, INC.** |
|                                  |                           |
|                                  |                           |
|                                  | By:                            | /s/ Ted  McNulty |
|                                  | Name:                          | Ted McNulty |
|                                  | Title:                         | SVP |
|                                  |                           |
|                                  | By:                            | /s/ Derrick  Pan |
|                                  | Name:                          | Derrick Pan |
|                                  | Title:                         | V.P. |
|                                  |                           |
|                                  |                           |
| **ACCEPTED AND AGREED TO**            |                           |
| **This 30th day of September, 2008.** |                           |   |
|                                  |                           |   |
| **CANO PETROLEUM, INC.**              |                           |   |
| ** **                            |                           |   |
| By:                                   | /s/ S.  Jeffrey Johnson        |   |
| Name:                                 | Jeff Johnson                   |   |
| Title:                                | Chairman & CEO             |   |
|                                       |                                |  |  |  |  |  |  |  |  |

 

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| **SQUARE ONE ENERGY, INC.**                    |                    |
|------------------------------------------------|-------------------------|
| **LADDER COMPANIES, INC.**                     |                    |
| **W.O. ENERGY OF NEVADA, INC.**                |                    |
| **WO ENERGY, INC.**                            |                    |
| **PANTWIST, LLC**                              |                    |
| **CANO PETRO OF NEW MEXICO, INC.**             |                    |
| ** **                                     |                    |
| ** **                                     |                    |
| Each by:                                       | /s/ S.  Jeffrey Johnson |   |
| Name:                                          | Jeff Johnson            |   |
| Title:                                         | President               |   |
|                                           |                    |
| ** **                                     |                    |
| **W.O. OPERATING COMPANY, LTD.**               |                    |
| By: WO Energy, Inc., its general  partner |                    |
|                                           |                    |
|                                           |                    |
| By:                                            | /s/ S.  Jeffrey Johnson |   |
| Name:                                          | Jeff Johnson            |   |
| Title:                                         | President               |   |
|                                           |                    |
| ** **                                     |                    |
| **W.O. PRODUCTION COMPANY, LTD.**              |                    |
| By: WO Energy, Inc., its general  partner |                    |
|                                           |                    |
|                                           |                    |
| By:                                            | /s/ S.  Jeffrey Johnson |   |
| Name:                                          | Jeff Johnson            |   |
| Title:                                         | President               |   |
|                                                |                         |  |  |  |  |

 

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