Exhibit 10.2


 


November 19, 2008


 


Cano
Petroleum, Inc.


Burnett
Plaza


801
Cherry Street


Suite 3200,
Unit 25


Fort
Worth, TX 76102


 


Attention: Ben Daitch,
Senior Vice President and Chief Financial Officer


 


Ladies and Gentlemen:


 


Cano
Petroleum, Inc. (the “Company”)
has advised UnionBanCal
Equities, Inc. (“UBE”)
that the Company desires to enter into a $15,000,000 subordinated, second lien
secured, multi-draw term loan facility (“Term Facility”)
to (a) finance the costs and expenses of entering into and funding the
Term Facility and (b) the ongoing working capital and other general
corporate purposes of the Company and its subsidiaries.


 


In connection with the
foregoing, UBE is pleased to advise you of its commitment to provide the full
principal amount of the Term Facility and to act as the sole administrative
agent (in such capacity, the “Administrative Agent”) for the Term Facility, all upon
and subject to the terms and conditions set forth in this letter (this “Commitment Letter”) and in the
Summary of Terms and Conditions attached as Exhibit A hereto and
incorporated herein by this reference (the “Summary of Terms”).


 


The commitment of UBE
hereunder is subject to the satisfaction of each of the following conditions
precedent in a manner acceptable to UBE: 
(a) the completion of a due diligence review of the assets,
liabilities (including contingent liabilities) and businesses of the Company
and its subsidiaries in scope and with results satisfactory to us in our sole
and absolute discretion; (b) the accuracy and completeness of all
representations that you and your affiliates make to UBE and your compliance
with the terms of this Commitment Letter (including the Summary of Terms); (c) prior
to closing of the Term Facility there shall be no competing offering, placement
or arrangement of any debt securities or bank financing by or on behalf of the
Company or any of their respective subsidiaries (other than the debt under the
Credit Agreement dated November 29, 2005 among the Company, Union Bank of
California, N.A., as administrative agent and issuing lender, and the lenders
party thereto from time to time (as heretofore and hereafter amended, the “Senior Credit Agreement”)); (d) the
negotiation, execution and delivery of definitive documentation for the Term
Facility consistent with the Summary of Terms and otherwise satisfactory to
UBE; (e) no material adverse change in or material disruption of
conditions in the financial, banking or capital markets generally; (f) no
change, occurrence or development that is reasonably likely in our opinion, to
have a material adverse effect on the business, prospects, assets, liabilities,
operations, or condition (financial or otherwise) of the Company and its
subsidiaries and affiliates, shall have occurred or become known to us; and (g) our
not becoming aware after the date hereof of any information or other matter
affecting the Company or any of its subsidiaries or affiliates which in our
judgment is inconsistent in a material and adverse manner with any information
or other matter disclosed to us prior to the date hereof.


 


You represent, warrant and
covenant that (a) all financial projections concerning the Company and its
subsidiaries that have been or are hereafter made available to UBE by you or
any of your representatives (or on your or their behalf) or by the Company or
any of its subsidiaries or representatives (or on their behalf) (the “Projections”) have been or will be prepared in
good faith based upon reasonable assumptions and (b) all information and
evaluations prepared by you and your advisors, or on your behalf,


 

















 


relating to the Term
Facility (together with the Projections, the “Information”), which has been or is
hereafter made available to UBE or the Lenders by you or any of your
representatives (or on your or their behalf) or by the Company or any of its
subsidiaries or representatives (or on their behalf), as and when furnished, is
and will be complete and correct in all material respects and does not and will
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements contained therein not misleading.  You agree to furnish us with further and
supplemental information from time to time until the date of the initial borrowing
under the Term Facility (the “Closing Date”) so that the representation, warranty and
covenant in the immediately preceding sentence are correct on the Closing Date
as if the Information were being furnished, and such representation, warranty
and covenant were being made, on such date. 
In issuing this commitment, UBE is and will be using and relying on the
Information without independent verification thereof.


 


By executing this Commitment
Letter, you agree to reimburse UBE from time to time on demand for all
out-of-pocket fees and expenses (including, but not limited to, (a) the
fees, disbursements and other charges of outside counsel to UBE, and of special
and local counsel, if any, retained by the Administrative Agent and (b) due
diligence expenses) incurred in connection with the Term Facility, the
syndication thereof and the preparation of the definitive documentation
therefor, and with any other aspect of the Term Facility and any similar
transaction and any of the other transactions contemplated thereby.


 


You agree to indemnify and
hold harmless UBE, each lender that may be party to the Term Facility from time
to time (the “Lenders”) and each of their
affiliates and their respective officers, directors, employees, agents,
advisors and other representatives (each an “Indemnified Party”) from and against
(and will reimburse each Indemnified Party as the same are incurred for) any
and all claims, damages, losses, liabilities and expenses (including, without
limitation, the reasonable fees, disbursements and other charges of counsel) that
may be incurred by or asserted or awarded against any Indemnified Party, in
each case arising out of or in connection with or by reason of (including,
without limitation, in connection with any investigation, litigation or
proceeding or preparation of a defense in connection therewith) the Term
Facility and any other financings, or any use made or proposed to be made with
the proceeds thereof (IN ALL CASES, WHETHER
OR NOT CAUSED OR ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE,
CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNIFIED PARTY), except to
the extent such claim, damage, loss, liability or expense is found in a final,
nonappealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party’s gross negligence or willful misconduct.  In the case of an investigation, litigation
or proceeding to which the indemnity in this paragraph applies, such indemnity
shall be effective whether or not such investigation, litigation or proceeding
is brought by you, your equityholders or creditors or an Indemnified Party,
whether or not an Indemnified Party is otherwise a party thereto and whether or
not any aspect of the Term Facility is consummated.  You also agree that no Indemnified Party shall
have any liability (whether direct or indirect, in contract or tort or
otherwise) to you or your subsidiaries or affiliates or to your or their
respective equity holders or creditors arising out of, related to or in
connection with any aspect of the Term Facility, except to the extent of direct,
as opposed to special, indirect, consequential or punitive, damages determined
in a final, nonappealable judgment by a court of competent jurisdiction to have
resulted from such Indemnified Party’s gross negligence or willful misconduct.  Notwithstanding any other provision of this
Commitment Letter, no Indemnified Party shall be liable for any damages arising
from the use by others of information or other materials obtained through
electronic telecommunications or other information transmission systems, other
than for direct or actual damages resulting from the gross negligence or
willful misconduct of such Indemnified Party as determined by a final and
nonappealable judgment of a court of competent jurisdiction.


 


This Commitment Letter and
the contents hereof are confidential and, except for disclosure hereof or
thereof on a confidential basis to your accountants, attorneys and other
professional advisors retained by 


 


2

















 


you in connection with the Term
Facility or as otherwise required by law, may not be disclosed in whole or in
part to any person or entity without our prior written consent; provided, however, it is understood and
agreed that you may disclose this Commitment Letter (including the Summary of
Terms) (a) on a confidential basis to the board of directors and advisors
of the Company in connection with their consideration of the Term Facility, and
(b) after your acceptance of this Commitment Letter, in filings with the
Securities and Exchange Commission and other applicable regulatory authorities
and stock exchanges.  UBE hereby notify
you that pursuant to the requirements of the USA PATRIOT Act, Title III of Pub.
L. 107-56 (signed into law October 26, 2001) (the “Act”), UBE is
required to obtain, verify and record information that identifies you, which
information includes your name and address and other information that will
allow UBE to identify you in accordance with the Act.


 


You acknowledge that UBE or
its affiliates may be providing financing or other services to parties whose
interests may conflict with yours.  UBE
further advises you that they will not make available to you confidential
information that they have obtained or may obtain from any other customer.  In connection with the services and
transactions contemplated hereby, you agree that UBE is permitted to access,
use and share with any of their bank or non-bank affiliates, agents, advisors
(legal or otherwise) or representatives any information concerning you or any
of your or its respective affiliates that is or may come into the possession of
UBE or any of its affiliates.


 


In connection with all
aspects of each transaction contemplated by this Commitment Letter, you
acknowledge and agree, and acknowledge your affiliates’ understanding,
that:  (a) (i) the arranging
and other services described herein regarding the Term Facility are
arm’s-length commercial transactions between you and your affiliates, on the
one hand, and UBE, on the other hand, (ii) you have consulted your own legal,
accounting, regulatory and tax advisors to the extent you have deemed
appropriate, and (iii) you are capable of evaluating, and understand and
accept, the terms, risks and conditions of the transactions contemplated
hereby; (b) (i) UBE has been, is, and will be acting solely as a
principal and, except as otherwise expressly agreed in writing by the relevant
parties, has not been, is not, and will not be acting as an advisor, agent or
fiduciary for you, any of your affiliates or any other person or entity and (ii) UBE
shall not any obligation to you or your affiliates with respect to the
transactions contemplated hereby except those obligations expressly set forth
herein; and (c) UBE and its affiliates may be engaged in a broad range of
transactions that involve interests that differ from yours and those of your
affiliates, and UBE has no obligation to disclose any of such interests to you
or your affiliates. To the fullest extent permitted by law, you hereby waive
and release any claims that you may have against UBE and its affiliates with
respect to any breach or alleged breach of agency or fiduciary duty in
connection with any aspect of any transaction contemplated by this Commitment
Letter.


 


The provisions of the
immediately preceding five paragraphs shall remain in full force and effect
regardless of whether any definitive documentation for the Term Facility shall
be executed and delivered, and notwithstanding the termination of this
Commitment Letter or any commitment or undertaking of UBE hereunder; provided, however, that you shall be
deemed released of your reimbursement and indemnification obligations hereunder
upon the execution of all definitive documentation for the Term Facility which
contain the comparable provisions related thereto, and the initial extension of
credit thereunder.


 


This Commitment Letter may
be executed in counterparts which, taken together, shall constitute an
original.  Delivery of an executed
counterpart of this Commitment Letter by telecopier or facsimile shall be
effective as delivery of a manually executed counterpart thereof.


 


This Commitment Letter
(including the Summary of Terms) shall be governed by, and construed in
accordance with, the laws of the State of Texas.


 


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WAIVER OF JURY TRIAL. 
Each of you and UBE hereby irrevocably waives any and all right to trial
by jury in any action, proceeding or counterclaim (whether based on contract,
tort or otherwise) arising out of or relating to this Commitment Letter
(including the Summary of Terms), the Term Facility and the other transactions
contemplated hereby and thereby or the actions of UBE in the negotiation,
performance or enforcement hereof.  The
commitments and undertakings of UBE may be terminated by us if you fail to
perform your obligations under this Commitment Letter on a timely basis.


 


This Commitment Letter
(including the Summary of Terms) embodies the entire agreement and
understanding among UBE, you, and your affiliates with respect to the Term
Facility and supersedes all prior agreements and understandings relating to the
specific matters hereof.  However, please
note that the terms and conditions of the commitment of, and the undertaking
of, UBE hereunder are not limited to those set forth herein or in the Summary
of Terms.  Those matters that are not
covered or made clear herein or in the Summary of Terms are subject to mutual
agreement of the parties.  No party has
been authorized by UBE to make any oral or written statements that are
inconsistent with this Commitment Letter.


 


This Commitment Letter is
not assignable by you without our prior written consent and is intended to be
solely for the benefit of the parties hereto and the Indemnified Parties.


 


This Commitment Letter and
all commitments and undertakings of UBE hereunder will expire at 5:00 p.m.
(Houston time) on November 19, 2008 unless you execute this Commitment
Letter and return it to us prior to that time (which may be by facsimile
transmission), whereupon this Commitment Letter (including the Summary of
Terms) shall become a binding agreement. 
Thereafter, all commitments and undertakings of UBE hereunder will
expire on December 19, 2008, unless the Closing Date occurs on or prior
thereto.  In consideration of the time
and resources that UBE will devote to the Term Facility, you agree that, until
such expiration, you will not solicit, initiate, entertain or permit, or enter
into any discussions in respect of, any offering, placement or arrangement of
any competing subordinated or second lien credit facility or facilities for the
Borrower and its subsidiaries with respect to the matters addressed in this
Commitment Letter.


 


THIS
WRITTEN AGREEMENT (WHICH INCLUDES THE SUMMARY OF TERMS) REPRESENTS THE FINAL
AGREEMENT BETWEEN 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
BETWEEN THE PARTIES.


 


[THE BALANCE OF THIS PAGE IS
INTENTIONALLY LEFT BLANK]


 


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We are pleased to have the
opportunity to work with you in connection with this important financing.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL
  EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  John Utz

  
	
   

  	
  Name:

  	
  John
  Utz

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Derrick Pan

  
	
   

  	
  Name:

  	
  Derrick
  Pan

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED AND AGREED TO

  	
   

  
	
  AS OF THE DATE FIRST ABOVE WRITTEN:

  	
   

  
	
   

  	
   

  
	
  CANO
  PETROLEUM, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Benjamin Daitch

  	
   

  
	
  Name:

  	
  Benjamin
  Daitch

  	
   

  
	
  Title:

  	
  SVP &
  CFO

  	
   

  



 


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Cano Petroleum, Inc.


Summary of Terms and Conditions


Up to $25,000,000 Subordinated Term Loan – November, 2008


 


	
  Borrower:

  	
   

  	
  Cano
  Petroleum, Inc. (“Cano” or the “Company”).

  
	
   

  	
   

  	
   

  
	
  Guarantors:

  	
   

  	
  All subsidiaries of the Company. Company and Guarantors collectively
  are referred to as “Loan Parties”.

  
	
   

  	
   

  	
   

  
	
  Administrative

  	
   

  	
   

  
	
  Agent and Sole

  	
   

  	
   

  
	
  Arranger:

  	
   

  	
  UnionBanCal Equities, Inc. (“UBE”) will serve as Administrative
  Agent (Agent”) and as Sole Arranger.

  
	
   

  	
   

  	
   

  
	
  Lender(s):

  	
   

  	
  UBE and one or more other Lenders mutually agreeable to the Borrower
  and the Agent.

  
	
   

  	
   

  	
   

  
	
  Loan:

  	
   

  	
  Up to a $25,000,000 Subordinated Term
  Credit Facility (the “Term Credit”). Amount of Initial Commitment under the
  Term Credit (see below) to be available as set forth below; additional
  availability above this Initial Commitment subject to approval of UBE and
  additional lender(s).

  
	
   

  	
   

  	
   

  
	
  Initial Commitment

  	
   

  	
   

  
	
  Under Term Credit:

  	
   

  	
  Up to $15,000,000 available, in $5,000,000
  minimum increments, from the Closing until 90 days thereafter (“Draw
  Period”).

  
	
   

  	
   

  	
   

  
	
  Use of Proceeds:

  	
   

  	
  Proceeds will be used for capital
  expenditures, working capital and other general corporate purposes.

  
	
   

  	
   

  	
   

  
	
  Maturity:

  	
   

  	
  4.5 years from Closing

  
	
   

  	
   

  	
   

  
	
  Repayment:

  	
   

  	
  All principal, plus accrued interest, due at Maturity.

  
	
   

  	
   

  	
   

  
	
  Optional

  	
   

  	
   

  
	
  Prepayment:

  	
   

  	
  The Loan may be partially (in minimum
  $2,500,000 increments) or fully repaid at any time subject to the Redemption
  Premiums.

  
	
   

  	
   

  	
   

  
	
  Mandatory

  	
   

  	
   

  
	
  Repayment:

  	
   

  	
  Change of control; asset sales. Subject to
  Redemption Premiums.

  
	
   

  	
   

  	
   

  
	
  Redemption

  	
   

  	
   

  
	
  Premiums:

  	
   

  	
  Year 1:

  	
  102%

  
	
   

  	
   

  	
  Year 2:

  	
  101%

  
	
   

  	
   

  	
  Thereafter:

  	
  100%

  
	
   

  	
   

  	
   

  
	
  Interest Rates:

  	
   

  	
  LIBOR plus 6.00% payable in cash quarterly
  in arrears. LIBOR tranche maturity to be 90 days.

  
	
   

  	
   

  	
   

  
	
  Default Rate:

  	
   

  	
  2.00% over the Interest Rate.

  
	
   

  	
   

  	
   

  
	
  Commitment Fee:

  	
   

  	
  During the Draw Period, 1.00% on undrawn
  amount of the Initial Commitment.

  
	
   

  	
   

  	
   

  
	
  Collateral:

  	
   

  	
  Second lien on same assets contemplated by
  the senior lenders, which

  



 


6

















 


	
   

  	
   

  	
  includes Union Bank of California, N.A.
  (“UBOC”) as Lead Arranger/Agent.

  
	
   

  	
   

  	
   

  
	
  Ranking:

  	
   

  	
  The Loan will rank junior to senior secured
  debt in an amount not to exceed the borrowing base in effect on the senior
  secured debt up to a maximum amount of $120,000,000, and all obligations
  under hedge agreements required and secured under the Senior Debt facility
  (collectively, the “Senior Debt”). The Loan will rank senior in right of
  payment to any indebtedness other than the Senior Debt. While the Loan is
  outstanding, the Borrower will not incur any new indebtedness, except under
  the Senior Credit Agreement, that is senior to the Loan except with the prior
  written consent of UBE.

  
	
   

  	
   

  	
   

  
	
  Subordination:

  	
   

  	
  Subordination provisions (such as payment
  blockage, standstill, rights upon bankruptcy and the like) will be agreed
  upon by UBE and UBOC. Any indebtedness that is junior to the Loan shall be
  unsecured, pay no principal prior to the payment in full in cash of the Loan,
  mature after the maturity of Loan, shall not pay interest while the Borrower
  is in payment or financial covenant default with respect to the Loan, and
  shall otherwise be subordinate in all respects to the Loan as UBE shall
  determine in its sole reasonable discretion.

  
	
   

  	
   

  	
   

  
	
  Guarantees:

  	
   

  	
  Same contemplated by UBOC Senior Debt. The obligations shall be
  subordinated to the guaranty provided to UBOC Senior Debt.

  
	
   

  	
   

  	
   

  
	
  Representations and

  	
   

  	
   

  
	
  Warranties, and

  	
   

  	
   

  
	
  Conditions

  	
   

  	
   

  
	
  Precedent:

  	
   

  	
  Same contemplated by UBOC Senior Debt.

  
	
   

  	
   

  	
   

  
	
  Affirmative

  	
   

  	
   

  
	
  Covenants:

  	
   

  	
  Same contemplated by UBOC Senior Debt.

  
	
   

  	
   

  	
   

  
	
  Negative

  	
   

  	
   

  
	
  Covenants:

  	
   

  	
  Same contemplated by UBOC Senior Debt other than financial covenants
  set forth below.

  
	
   

  	
   

  	
   

  
	
  Financial

  	
   

  	
   

  
	
  Covenants:

  	
   

  	
  Minimum Current Ratio

  
	
   

  	
   

  	
  The Borrower’s ratio of consolidated current assets to consolidated
  current liabilities shall not be less than 1.00:1.00, calculated quarterly.
  For purposes of this calculation, the Borrower’s current assets will include
  unused availability under the Revolver, consolidated current liabilities will
  exclude current maturities of the Credit Facility, and both current assets
  and current liabilities will exclude non-cash obligations under FAS 133 and
  FAS 143.

  



 


7

















 


	
   

  	
   

  	
  Minimum
  Interest Coverage Ratio

  
	
   

  	
   

  	
  The
  Borrower’s ratio of EBITDAX to Interest cannot be less than 2.5:1.0 on a
  rolling four quarter basis.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Maximum
  Debt to EBITDAX

  
	
   

  	
   

  	
  The Borrower’s ratio of Total Indebtedness to EBITDAX cannot exceed
  4.5X for each four quarter period, commencing with the four-fiscal quarter
  period ending December 31, 2008.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Minimum Asset Coverage Ratio

  
	
   

  	
   

  	
  Borrower will maintain a ratio of Total Proved PV10 Reserves to Total
  Debt of not less than 1.50 to 1.0. For purposes of this test, “Total Proved
  PV10 Reserves” shall be determined in accordance with SEC guidelines, with
  the following exceptions: (i)  commodity prices shall be forecasted
  according to a “Strip Price,” adjusted for any basis differential and any
  existing commodity hedges for forecasting oil & gas prices (“Strip
  Price” forecast shall mean the equivalent swap price as quoted by NYMEX for
  three years and held constant thereafter, based on the average of the last
  twelve months), (ii)  operating expenses will be held constant, and
  (iii) the PDP category must comprise at least 60% of the Total Proved
  PV10. The covenant will be tested semi-annually or at any other time the
  Senior Debt borrowing base is recalculated.

  
	
   

  	
   

  	
   

  
	
  Reporting

  	
   

  	
   

  
	
  Requirements:

  	
   

  	
  Same contemplated by UBOC Senior Debt.

  
	
   

  	
   

  	
   

  
	
  Assignments &

  	
   

  	
   

  
	
  Participations:

  	
   

  	
  UBE may assign or participate its commitment with consent of Borrower,
  which consent shall not be unreasonably withheld; provided that no such
  consent shall be required if an event of default has occurred and remains in
  effect at the time of the assignment or participation.

  
	
   

  	
   

  	
   

  
	
  Events of Default:

  	
   

  	
  Same contemplated by UBOC Senior Debt
  (other than financial covenant defaults).

  
	
   

  	
   

  	
   

  
	
  Rights of Cure:

  	
   

  	
  Senior lender(s) and Borrower shall
  permit UBE an opportunity to cure any event of default that requires an
  enforcement action under the senior loan documents. UBE shall have thirty
  (30) business days after receiving a default notice from senior lender to
  cure such events of default. Such cure rights will be further explained in
  the inter-creditor agreement between UBE and senior lender(s).

  
	
   

  	
   

  	
   

  
	
  Expenses:

  	
   

  	
  Usual and customary including legal,
  accounting, technical due diligence (including engineering), title,
  administration, appraisal, environmental and other due diligence required.

  
	
   

  	
   

  	
   

  
	
  Required Lenders:

  	
   

  	
  If three or fewer Lenders (including UBE),
  100%

  



 


8

















 


	
   

  	
   

  	
  Otherwise, greater than 50%.

  
	
   

  	
   

  	
   

  
	
  UBE Counsel:

  	
   

  	
  Bracewell & Giuliani LLP

  
	
   

  	
   

  	
   

  
	
  Governing Law:

  	
   

  	
  State of Texas

  
	
   

  	
   

  	
   

  
	
  Disclaimer:

  	
   

  	
  This Term Sheet is preliminary and is subject to documentation
  acceptable to UBE.

  



 


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