EXHIBIT 10.3


EMPLOYEE RESTRICTED STOCK AWARD


CANO PETROLEUM, INC.

2005
LONG-TERM INCENTIVE PLAN


Pursuant
to the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan (the “Plan”) for key
employees, key consultants, and outside directors of Cano Petroleum, Inc., a
Delaware corporation (the “Company”)
and its Subsidiaries,


Patrick M. McKinney

(the “Participant”)


has
been granted a Restricted Stock Award in accordance with Section 6.4 of the
Plan.


1.               Terms of Award.  The number of shares of Common Stock awarded
under this Award Agreement (this “Agreement”) 
is 30,000 shares (the “Awarded Shares”). 
The Date of Grant of this Award is June 1, 2006.


2.               Subject to Plan.  This Agreement is subject to the terms and
conditions of the Plan, and the terms of the Plan shall control to the extent
not otherwise inconsistent with the provisions of this Agreement.  The capitalized terms used herein that are
defined in the Plan shall have the same meanings assigned to them in the Plan.  This Agreement is subject to any rules promulgated
pursuant to the Plan by the Board or the Committee and communicated to the
Participant in writing.


3.               Vesting.  Except as specifically provided in this
Agreement and subject to certain restrictions and conditions set forth in the
Plan, all the Awarded Shares shall be vested on the third anniversary of the
Date of Grant, provided the Participant is employed by (or, if the Participant
is a Consultant, is providing services to) the Company or a Subsidiary on that
date.


4.               Forfeiture of Awarded Shares. Awarded
Shares that are not vested in accordance with Section 3 shall be
forfeited on the date of the Participant’s Termination of Service. Upon
forfeiture, all of the Participant’s rights with respect to the forfeited
Awarded Shares shall cease and terminate, without any further obligations on
the part of the Company.


5.               Restrictions on Awarded
Shares. Awarded Shares that are not vested in accordance with Section 3
and which are subject to forfeiture in accordance with Section 4 shall
be subject to the terms, conditions, provisions, and limitations of this Section
5.


a.               Subject to the provisions of
the Plan and the other terms of this Agreement, from the Date of Grant until
the date the Awarded Shares are vested in accordance with Section 3 and
no longer subject to forfeiture in accordance with Section 4 (the “Restriction Period”),
the Participant shall not be permitted to sell, transfer, pledge or assign
shares any of the Awarded Shares.









 



b.              Except as provided in
paragraph (a) above, the Participant shall have, with respect to his or her
Awarded Shares, all of the rights of a stockholder of the Company, including
the right to vote the shares, and the right to receive any dividends thereon.


6.               Legend.  The following legend shall be placed on all
certificates representing Awarded Shares:


On the face of the certificate:


“Transfer of this stock is restricted in
accordance with conditions printed on the reverse of this certificate.”


On the reverse:


“The shares of stock evidenced by this
certificate are subject to and transferable only in accordance with that
certain Cano Petroleum, Inc. 2005 Long-Term Incentive Plan, a copy of which is
on file at the principal office of the Company in Dallas, Texas.  No transfer or pledge of the shares evidenced
hereby may be made except in accordance with and subject to the provisions of
said Plan.  By acceptance of this
certificate, any holder, transferee or pledgee hereof agrees to be bound by all
of the provisions of said Plan.”


The following legend shall be inserted on a
certificate evidencing Common Stock issued under the Plan if the shares were
not issued in a transaction registered under the applicable federal and state
securities laws:


“Shares of stock represented by this
certificate have been acquired by the holder for investment and not for resale,
transfer or distribution, have been issued pursuant to exemptions from the
registration requirements of applicable state and federal securities laws, and
may not be offered for sale, sold or transferred other than pursuant to effective
registration under such laws, or in transactions otherwise in compliance with
such laws, and upon evidence satisfactory to the Company of compliance with
such laws, as to which the Company may rely upon an opinion of counsel
satisfactory to the Company.”


All Awarded Shares owned by the Participant
shall be subject to the terms of this Agreement and shall be represented by a
certificate or certificates bearing the foregoing legend.


7.               Delivery of Certificates.  Certificates for Awarded Shares free of restriction
under this Agreement shall be delivered to the Participant promptly after, and
only after, the Restriction Period shall expire without forfeiture in respect
of such shares of Common Stock. 
Certificates for shares of Common Stock forfeited pursuant to Section
4 shall be promptly returned to the Company by the Participant.  In connection with the issuance of a
certificate 



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for Restricted Stock, the Participant shall
endorse such certificate in blank or execute a stock power in a form
satisfactory to the Company in blank and deliver such certificate and executed
stock power to the Company.  The parties
acknowledge that remedies at law will be inadequate remedies for breach of this
Section 7 and consequently agree that this Section 7 shall be
enforceable by specific performance.  The
remedy of specific performance shall be cumulative of all of the rights and
remedies at law or in equity of the parties under this Section 7.


8.               Voting.  The Participant, as record holder of the
Awarded Shares, has the exclusive right to vote, or consent with respect to,
such Awarded Shares until such time as the Awarded Shares are transferred in
accordance with this Agreement or a proxy is granted pursuant to Section 9
below; provided, however, that this Section 8 shall not
create any voting right where the holders of such Awarded Shares otherwise have
no such right.


9.               Proxies.  Participant may not grant a proxy to any
person, other than a revocable proxy not to exceed 30 days in duration granted
to another stockholder for the sole purpose of voting for directors of the
Company.


10.         Representations, Etc.  Each spouse individually is bound by, and
such spouse’s interest, if any, in any Awarded Shares is subject to, the terms
of this Agreement.  Nothing in this
Agreement shall create a community property interest where none otherwise
exists.


11.         Simultaneous Death.  If Participant and his or her spouse both
suffer a common accident or casualty which results in their respective deaths
within 60 days of each other, it shall be conclusively presumed, for the
purpose of this Agreement, that the Participant died first and the spouse died
thereafter.


12.         Participant’s
Representations. 
Notwithstanding any of the provisions hereof, the Participant hereby
agrees that he will not acquire any Awarded Shares, and that the Company will
not be obligated to issue any Awarded Shares to the Participant hereunder, if
the issuance of such shares shall constitute a violation by the Participant or
the Company of any provision of any law or regulation of any governmental
authority.  Any determination in this
connection by the Company shall be final, binding, and conclusive.  The obligations of the Company and the rights
of the Participant are subject to all applicable laws, rules, and regulations.


13.         Participant’s
Acknowledgments.  The
Participant acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Award subject to all the terms and provisions thereof. The Participant
hereby agrees to accept as binding, conclusive, and final all decisions or
interpretations of the Board or the Committee upon any questions arising under
the Plan or this Agreement.


14.         Law Governing.  This Agreement shall be governed by, construed,
and enforced in accordance with the laws of the State of Texas (excluding any conflict of laws
rule or principle of Texas law
that might refer the governance, construction, or interpretation of this
agreement to the laws of another state).



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15.         Legal Construction.  In the event that any one or
more of the terms, provisions, or agreements that are contained in this
Agreement shall be held by either a court of competent jurisdiction, with
respect to claims under Section 7, or by an arbitrator, with respect to
all other claims under the Agreement, to be invalid, illegal, or unenforceable
in any respect for any reason, the invalid, illegal, or unenforceable term,
provision, or agreement shall not affect any other term, provision, or
agreement that is contained in this Agreement and this Agreement shall be
construed in all respects as if the invalid, illegal, or unenforceable term,
provision, or agreement had never been contained herein.


16.         Covenants and Agreements as
Independent Agreements. Each of the covenants and agreements that
is set forth in this Agreement shall be construed as a covenant and agreement
independent of any other provision of this Agreement.  The existence of any claim or cause of action
of the Participant against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
the covenants and agreements that are set forth in this Agreement.


17.         Entire Agreement.  This Agreement together with the Plan
supersede any and all other prior understandings and agreements, either oral or
in writing, between the parties with respect to the subject matter hereof and
constitute the sole and only agreements between the parties with respect to the
said subject matter.  All prior negotiations
and agreements between the parties with respect to the subject matter hereof
are merged into this Agreement.  Each
party to this Agreement acknowledges that no representations, inducements,
promises, or agreements, orally or otherwise, have been made by any party or by
anyone acting on behalf of any party, which are not embodied in this Agreement
or the Plan and that any agreement, statement or promise that is not contained
in this Agreement or the Plan shall not be valid or binding or of any force or
effect.


18.         Parties Bound.  The terms, provisions, and agreements that
are contained in this Agreement shall apply to, be binding upon, and inure to
the benefit of the parties and their respective heirs, executors,
administrators, legal representatives, and permitted successors and assigns,
subject to the limitation on assignment expressly set forth herein.  No person or entity shall be permitted to
acquire any Awarded Shares without first executing and delivering an agreement
in the form satisfactory to the Company making such person or entity subject to
the restrictions on transfer contained in Section 5 hereof.


19.         Modification.  No change or modification of this Agreement
shall be valid or binding upon the parties unless the change or modification is
in writing and signed by the parties; provided, however, that the Company may
change or modify this Agreement without the Participant’s consent or signature
if the Company determines, in its sole discretion, that such change or
modification is necessary for purposes of compliance with or exemption from the
requirements of Section 409A of the Code or any regulations or other guidance
issued thereunder.  Notwithstanding the
preceding sentence, the Company may amend the Plan to the extent permitted by
the Plan.



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20.         Headings.  The headings that are used in this Agreement
are used for reference and convenience purposes only and do not constitute
substantive matters to be considered in construing the terms and provisions of
this Agreement.


21.         Gender and Number.  Words of any gender used in this Agreement
shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, and vice versa, unless the
context requires otherwise.


22.         Notice.  Any notice required or permitted to be
delivered hereunder shall be deemed to be delivered only when actually received
by the Company or by the Participant, as the case may be, at the addresses set
forth below, or at such other addresses as they have theretofore specified by
written notice delivered in accordance herewith:


(a)          Notice to the Company shall
be addressed and delivered as follows:


Cano Petroleum, Inc.

309 West
Seventh Street, Suite 1600

Fort
Worth, Texas  76102

Attn:  General Counsel

Facsimile:  (817)
698-0796


(b)         Notice to the Participant
shall be addressed and delivered as set forth on the signature page.


23.         Tax Requirements.  The Participant is hereby advised to consult
immediately with his or her own tax advisor regarding the tax consequences of
this Agreement, the method and timing for filing an election to
include this Agreement in income under Section 83(b) of the Code, and the
tax consequences of such election.  By execution of this
Agreement, the Participant agrees that if the Participant makes such an
election, the Participant shall provide the Company with written notice of such
election in accordance with the regulations promulgated under Code Section
83(b).  The Company or, if
applicable, any Subsidiary (for purposes of this Section 23, the term “Company” shall
be deemed to include any applicable Subsidiary), shall have the right to deduct
from all amounts paid in cash or other form in connection with the Plan, any
Federal, state, local, or other taxes required by law to be withheld in
connection with this Award.  The Company
may, in its sole discretion, also require the Participant receiving shares of
Common Stock issued under the Plan to pay the Company the amount of any taxes
that the Company is required to withhold in connection with the Participant’s
income arising with respect to this Award. 
Such payments shall be required to be made when requested by Company and
may be required to be made prior to the delivery of any certificate
representing shares of Common Stock. 
Such payment may be made (i) by the delivery of cash to the Company in
an amount that equals or exceeds (to avoid the issuance of fractional shares
under (iii) below) the required tax withholding obligations of the Company;
(ii) if the Company, in its sole discretion, so consents in writing, the actual
delivery by the exercising Participant to the Company of shares of Common Stock
that the Participant has not acquired from the Company within six (6) months
prior to the date of exercise, which shares so delivered have an aggregate Fair
Market Value that equals 



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or exceeds (to avoid the issuance of
fractional shares under (iii) below) the required tax withholding payment;
(iii) if the Company, in its sole discretion, so consents in writing, the
Company’s withholding of a number of shares to be delivered upon the exercise
of this Award, which shares so withheld have an aggregate fair market value
that equals (but does not exceed) the required tax withholding payment; or (iv)
any combination of (i), (ii), or (iii). 
The Company may, in its sole discretion, withhold any such taxes from
any other cash remuneration otherwise paid by the Company to the Participant.


[Signature Page to Follow]


 



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IN
WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and the Participant, to evidence his consent and
approval of all the terms hereof, has duly executed this Agreement, as of the
date specified in Section 1 hereof.


	
  

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Chairman and CEO

  



 


	
  

  	
  PARTICIPANT:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature: 

  	
  /s/ Patrick M. McKinney

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  PATRICK M. MCKINNEY

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
  722 Ashleigh Lane

  
	
   

  	
   

  	
  Southlake, Texas 76072

  



 



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