Exhibit 10.11


 


SUPPLEMENT NO. 1 dated as of April 28, 2006 (the “Supplement”),
to the Pledge Agreement dated as of November 29, 2005 (as amended,
supplemented or otherwise modified from time to time, the “Pledge Agreement”)
by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each other party signatory hereto (together with the Borrower, the “Pledgors”
and individually, each a “Pledgor”) and Union Bank of California, N.A.
as collateral trustee (in such capacity, the “Collateral Trustee”) under the
Collateral Trust Agreement (as hereinafter defined) for the benefit of the
Secured Parties (as hereinafter defined).


 


RECITALS


 


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


 


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


 


(ii)           that
certain Subordinated Credit Agreement dated as of November 29, 2005 (as
heretofore and hereafter may be amended, restated or otherwise modified
from time to time, the “Subordinated Credit Agreement”, and together
with the Senior Credit Agreement, the “Master Debt Agreements”), among
the Borrower, the lenders party thereto from time to time (the “Subordinated
Lenders”), and Energy Components SPC EEP Energy Exploration and Production
Segregated Portfolio as administrative agent for such Subordinated Lenders (in
such capacity, the “Subordinated Agent”); and


 


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


 


B.            In connection with the
Master Debt Agreements, the Senior Agent, the Senior Lenders, the Subordinated
Loan Agent, the Subordinated Lenders, the Collateral Trustee, the Borrower, and
other parties thereto, have entered into that certain Collateral Trust and
Intercreditor Agreement dated as of even date herewith (as it may be
amended, restated, or otherwise modified from time to time, the “Collateral
Trust Agreement”), to among other things, appoint the Collateral Trustee as
collateral trustee for all of the Secured Parties under the security documents
executed in connection with the Master Debt Agreements, including the Pledge
Agreement, and set forth the rights and remedies of the Secured Parties with
respect thereto.


 


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


 

















 


such
new Subsidiary as additional Pledged Collateral. The Borrower is executing this
Supplement in accordance with the requirements of the Credit Agreement to
supplement its Pledged Collateral under the Pledge Agreement in order to induce
the Lenders to make additional Advances and the Issuing Lender to issue
additional Letters of Credit and as consideration for Advances previously made
and Letters of Credit previously issued.


 


D.            Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned to
such terms in the Pledge Agreement and the Collateral Trust Agreement.


 


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


 


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


 


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


 


SECTION 3.           The Borrower represents
and warrants to the Collateral Trustee and the other Secured Parties that this Supplement
has been duly authorized, executed and delivered by it and constitutes its
legal, valid and binding obligation, enforceable against it in accordance with
its terms (subject to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors’ rights generally and subject,
as to enforceability, to equitable principles of general application
(regardless of whether enforcement is sought in a proceeding in equity or at
law)).


 


SECTION 4.           This Supplement may be
executed in counterparts, each of which shall constitute an original, but all
of which when taken together shall constitute a single contract. This
Supplement shall become effective when the Collateral Trustee shall have
received counterparts of this Supplement that, when taken together, bear the
signatures of the Pledgors and the Collateral Trustee. Delivery of an executed
signature page to this Supplement by facsimile transmission shall be as
effective as delivery of a manually signed counterpart of this Supplement.


 


SECTION 5.           Each Pledgor hereby
represents and warrants that (a) set forth on Schedules 2.02(a), 2.02(b),
and 2.02(c) attached hereto are true and correct schedules of all its
Membership Interests, Partnership Interests and Pledged Shares, as each term is
defined in the Pledge Agreement, and (b) set forth on Schedule 3
attached hereto are its respective sole jurisdiction of formation, type of
organization, its federal tax identification number and the


 


2

















 


organizational
number, and all names used by it during the last five years prior to the date
of this Supplement.


 


SECTION 6.           Except as expressly
supplemented hereby, the Pledge Agreement shall remain in full force and
effect.


 


SECTION 7.           THIS SUPPLEMENT SHALL
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF TEXAS.


 


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


 


SECTION 9.           All communications and
notices hereunder shall be in writing and given as provided in the Pledge
Agreement.


 


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


 


THIS SUPPLEMENT, THE PLEDGE
AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE OTHER MASTER DEBT DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


[SIGNATURES PAGES FOLLOW]


 


3

















 


IN WITNESS WHEREOF, the Pledgors and the
Collateral Trustee have duly executed this Supplement to the Pledge Agreement
as of the day and year first above written.


 


	
   

  	
  PLEDGORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  S. Jeffrey
  Johnson

  	
   

  
	
   

  	
   

  	
  Chief
  Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
  WO
  ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
   /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  COLLATERAL
  TRUSTEE:

  
	
   

  	
   

  
	
   

  	
  UNION
  BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Kimberly Coil

  	
   

  
	
   

  	
   

  	
  Kimberly Coil

  	
   

  
	
   

  	
   

  	
  Vice President

  	
   

  
							



 


4

















 


Schedules


Supplement No. 1 


to the Pledge Agreement


 


Pledged Collateral


 


SCHEDULE 2.02(a)


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership

  Interest Owned

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Pantwist, LLC

  	
   

  	
  Limited liability

  	
   

  	
  100

  	
  %

  



 


SCHEDULE 2.02(b)


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Partnership

  Interest

  	
   

  	
  % of Partnership

  Interest Owned

  	
   

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  W.O. Operating Company, Ltd.

  	
   

  	
  Limited Partnership Interest

  	
   

  	
  95% Limited Partnership Interest

  	
   

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  W.O. Production Company, Ltd.

  	
   

  	
  Limited Partnership Interest

  	
   

  	
  95% Limited Partnership Interest

  	
   

  
	
  WO Energy, Inc.

  	
   

  	
  W.O. Operating Company, Ltd.

  	
   

  	
  General Partnership Interest

  	
   

  	
  5% General Partnership Interest

  	
   

  
	
  WO Energy, Inc.

  	
   

  	
  W.O. Production Company, Ltd.

  	
   

  	
  General Partnership Interest

  	
   

  	
  5% General Partnership Interest

  	
   

  



 


SCHEDULE 2.02(c)


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of

  Shares

  	
   

  	
  Number

  of

  Shares

  	
   

  	
  % of Shares

  Owned

  	
   

  	
  Certificate

  No.

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Square One Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,500

  	
   

  	
  100

  	
  %

  	
  4

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Ladder Companies, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  	
  7

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,200

  	
   

  	
  100

  	
  %

  	
  5

  	
   

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  WO Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,100

  	
   

  	
  100

  	
  %

  	
  6

  	
   

  



 

















 


SCHEDULE 3


 


PLEDGOR
INFORMATION


 


	
  Pledgor:

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  3664494

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  77-0635673

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Pledgor:

  	
   

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Nevada

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  C20757-1996-001

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  88-0369151

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Pledgor:

  	
   

  	
  WO Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  113518200

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2303966

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.