Document:

EXHIBIT
10.73

 

EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT
(this “Agreement”) is made and entered into by and between Cano Petroleum Inc., a Delaware corporation with its
principal executive offices in Fort Worth, Texas (the “Company”), and Patrick M. McKinney, an individual
currently residing in Tarrant County, Texas (“Vice President”), as of the 1st
day of June, 2006 (the “Effective Date”). 
The Company and Vice President may sometimes be referred to herein
individually as “Party” and collectively as “Parties.”

 

Background

 

A.            The Company desires to employ Vice
President in such a manner as will reinforce and encourage the highest
attention and dedication to the Company and in the best interest of the Company
and its shareholders; and

 

B.            Vice President is willing to serve
the Company on the terms and conditions herein provided.

 

Terms and Conditions

 

In consideration
of the covenants and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Parties hereto agree as follows:

 

1.             Employment.  The Company hereby employs Vice President in
the capacity of Vice President — Business Development, and Vice President
hereby agrees to accept such employment by the Company, upon the terms and
conditions stated in this Agreement.

 

2.             Term.  The employment
of Vice President by the Company as provided in this Section will be for a
term of three (3) years (the “Term”)
commencing on the Effective Date and expiring at the close of business on May 31,
2009.  After the Employment Term,
this Agreement shall be automatically renewed for an indefinite number of
successive one-year periods (a “Renewal Term”), unless either party gives
written notice of its intent not to renew the Agreement no less than 30 days
before the conclusion of the Term or Renewal Term, as applicable.  For the purposes of this Agreement, the Term
and Renewal Term(s) shall be collectively called the “Employment Period.” 
In the event, however, that Vice President remains in the employ of the
Company after the term of this Agreement without the parties having entered
into a new employment agreement or extending this Agreement, then (i) the
terms of this Agreement shall not be applicable, (ii) Vice President shall
be an employee-at-will subject to the benefits, programs, and policies of the
Company then in effect, and (iii) either party may terminate the
employment relationship at any time with or without cause.

 

3.             Duties.  Vice President
shall perform such services and duties as may be assigned to him from time to
time by the Chief Executive Officer of the Company.  Vice President shall devote his full working
time, efforts and energies to the performance of his duties hereunder, which
shall include managing the business development affairs of the Company.

 

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4.             Compensation.

 

(a)           Salary:  The Company shall pay Vice President for his
services, a base salary, on an annualized basis, of $185,000.00 (One Hundred
Eighty-Five Thousand Dollars) per annum for the period from the Effective Date,
which salary shall be payable by the Company in substantially equal
installments on the Company’s normal payroll dates.  All applicable taxes
on the base salary will be withheld in accordance with applicable federal,
state and local taxation guidelines.

 

(b)           Signing Bonus:  In addition to the base salary described in
paragraph 4(a) above, Vice President shall receive, in his first salary
installment payment, a signing bonus in the amount of $30,000.00 (Thirty
Thousand Dollars).  All applicable taxes
on the signing bonus will be withheld in accordance with applicable federal,
state and local taxation guidelines.

 

(c)           Bonus: In addition to the base
salary described in paragraph 4(a) above, Vice President shall be eligible
for periodic cash bonuses in an amount up to 100% of the then base salary
and/or stock bonuses at the discretion of the Chief Executive Officer of the
Company.

 

(d)           Stock Award:  In addition to the base salary described in
paragraph 4(a) above, Vice President shall receive 30,000 shares of
restricted common stock in the Company. 
The restrictions on the shares shall lapse on May 31, 2009,
provided Vice President is still employed by the Company at that time.  The terms and conditions of this restricted
stock award shall be contained in an agreement to be executed by the Company
and Vice President and which will be awarded pursuant to the 2005 Cano
Petroleum, Inc. Long Term Incentive Plan.

 

(e)           Raises:  Vice President may receive periodic increases
in the base salary at the discretion of the Chief Executive Officer of the
Company, which increased base salary shall become the base salary for purposes
of this Agreement.

 

5.             Vacations and Days Off. 
Vice President shall be entitled to a reasonable paid vacation of not less than
twenty (20) days each calendar year during the Employment Period (prorated for
the first calendar year), exclusive of holidays and weekends, which vacation
shall be taken by Vice President in accordance with the business requirements
of the Company at the time and its vacation plans, policies and practices as
applied to other officers of the Company then in effect relative to this
subject.  Vice President shall also be entitled to up to five (5) paid
days off each calendar year for paternity leave and up to three (3) paid
days off to attend the funeral of any member of Vice President’s immediate
family.

 

6.             Employment Facilities. 
During the Employment Period, the Company shall provide, at its expense,
appropriate and adequate office space, furniture, communications, stenographic
and word-processing equipment, supplies and such other facilities and services
as

 

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shall be suitable to Vice
President’s position or necessary for Vice President to perform his assigned
tasks, duties and responsibilities under this Agreement.

 

7.             Expenses and Services. 
During the Employment Period, Vice President shall be entitled to receive
prompt reimbursement for all pre-approved, reasonable expenses incurred by Vice
President by reason of his employment, including travel and living expenses
while away from home at the request of and in the service of the Company,
provided that such expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company and in effect when the
expenses are incurred.

 

8.             Rights under Certain Plans. 
During the Employment Period, Vice President shall be entitled to participate
in any employee stock ownership plans, 401K plans, health and dental insurance
and other employee benefit plans and programs maintained by the Company
applicable to other employees on the same basis as other employees of the
Company.

 

9.                                       Confidential Information and
Non-Competition Agreement.

 

(a)           Vice President and the Company agree
that, upon executing this Agreement, the Company promises to provide, and will
provide, Vice President with its confidential information, including, without
limitation, customer information, trade secrets, lists of suppliers and costs,
information concerning the business and operations of the Company and its
Affiliates and other proprietary data or information, that is valuable, special
and a unique asset of the Company and its Affiliates (hereafter “Confidential
Information”).  Vice President agrees not to disclose Confidential
Information, except as may be necessary in the performance of his duties, to
any Person, nor use such Confidential Information, except as may be necessary
in the performance of his duties, either (i) during his employment by the
Company; (ii) following Vice President’s termination from employment, and;
(iii) following expiration of this Agreement without renewal or
replacement, unless Vice President has received the prior written consent of
the Company to disclose or use Confidential Information.  Upon termination of Vice President’s
employment for any reason or upon a request, at any time, by the Company, Vice
President shall promptly deliver to the Company all Confidential Information,
including all drawings, manuals, letters, notebooks, customer lists, documents,
records, equipment, files, computer disks or tapes, reports or any other
materials relating to the Company’s business (and all copies) which are in Vice
President’s possession or under Vice President’s control.

 

(b)           To protect the Company’s Confidential
Information, and in the event of Vice President’s termination of employment for
any reason whatsoever, whether by Vice President or the Company, it is
necessary to enter into the following restrictive covenant, which is ancillary
to the enforceable promises and agreements between the Company and Vice
President in Paragraph 9(a) of this Agreement.  Without the prior written consent of the
Company, signed by Chairman and CEO of the Company, Vice President shall not,
directly or indirectly, during his employment with the Company and for a period
of one (1) year following the termination of employment:

 

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(i)            Engage in or perform services for a
Competing Business.  For purposes of this
Agreement, a “Competing Business” is one that provides the same or
substantially similar products and services as those provided by the Company
during Vice President’s employment, including, without limitation, primary, secondary
and enhanced oil recovery techniques. 
Vice President agrees and understands that the Company’s business is
international in scope and its products are marketed throughout the United
States.  The geographic area for purposes
of this restriction is the area within the entire State of Texas.

 

(ii)           Solicit business from, attempt to do
business with, or do business with any client or prospective client of the
Company with whom the Company transacted business or solicited within the
preceding 12 months, and which either: (1) Vice President contacted,
called on, serviced, did business with or had significant contact with during
Vice President’s employment at the Company or that Vice President attempted to
contact, call on, service, or do business with during the his employment with
the Company; or (2) Vice President became acquainted with as a result of
his employment at the Company.  This
restriction applies only to business that is in the scope of services or
products provided by the Company.

 

(iii)          Solicit, induce or attempt to solicit
or induce, on behalf of himself or any other person or entity, any employee or
independent contractor of the Company to terminate their employment or
relationship with the Company and/or accept employment elsewhere.

 

(iv)          Solicit, induce or attempt to solicit
or induce, any client or prospective client of the Company to cease or curtail
their business relationship with the Company.

 

10.           Early Termination. Vice
President’s employment hereunder may be terminated without any breach of this
Agreement only under the following circumstances:

 

(a)           Vice President’s employment hereunder
will terminate upon his death;

 

(b)           If, as a result of Vice President’s incapacity due to
physical or mental illness, Vice President shall have been absent from his
duties or unable to perform his full duties hereunder for a total of 90 days
during any 12 month period (“Disability Period”), and within 15 days after
written notice of termination is given (which may occur before or after the end
of such 90 day period), shall not have returned to the performance of his full
duties hereunder on a full-time basis, the Company may terminate Vice President’s
employment hereunder. The determination of Vice President’s incapacity  due to physical or mental illness shall be
made by Vice President’s attending physician unless the Company disagrees with
such determination, in which case Vice President’s incapacity shall be
determined by a majority of three physicians qualified to practice medicine in
the State of the Texas, one to be selected by each of Vice President (or his
authorized

 

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representative) and the Company and the third to be
selected by such two designated physicians

 

(c)          The Company may terminate Vice President’s
employment hereunder for Cause.  For purposes of this Agreement, the
Company shall have “Cause” to terminate Vice President’s employment hereunder
upon (i) Vice President’s financial dishonesty, including, without
limitation, misappropriation of funds or property, or any attempt by Vice
President to secure any personal profit related to the business or business
opportunities of the Company without the informed, written approval of the
Company; (ii) Vice President’s willful refusal for at least ten (10) days
to comply with reasonable directives of the Company after receipt by Vice
President of prior written notice from the Company specifying such
noncompliance; (iii) gross negligence or reckless or willful misconduct in
the performance of Vice President’s duties; (iv) the failure to perform,
or continuing neglect in the performance of, duties assigned to Vice President
for at least ten (10) days after receipt by Vice President from the
Company of prior written notice of such failure or neglect; (v) misconduct
which has a materially adverse effect upon the Company’s business or
reputation; (vi) Vice President’s use of illicit or illegal drugs; (vii) Vice
President’s abuse of alcohol or prescription medication; (viii) the
conviction of, or plea of nolo contendre to, any felony or a misdemeanor
involving moral turpitude or fraud; (ix) continuing the material breach of
any provision of this Agreement for at least ten (10) days after receipt
by Vice President from the Company of prior written notice of such breach; (x) the
violation of the Company’s policies including, without limitation, the Company’s
policies on equal employment opportunity and prohibition of unlawful
harassment, discrimination or retaliation; or (xi) a violation of Paragraph 9
of this Agreement.

 

(d)           Any termination of Vice President’s employment by the
Company or by Vice President (other than termination pursuant to
subsection (a) above) shall be communicated by written Notice of
Termination to the other Party hereto.  For purposes of this Agreement, a “Notice
of Termination” shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Vice President’s employment under the provision so indicated.

 

(e)           “Date of Termination” shall mean (i) if
Vice President’s employment is terminated by his death, the date of his death; (ii) if
Vice President’s employment is terminated pursuant to subsection (b) above,
15 days after Notice of Termination is given (provided that Vice President
shall not have returned to the performance of his duties on a full-time basis
during such 15 days period); (iii) if Vice President’s employment is
terminated at the expiration of the Term, Renewal Term, or any extension
thereof, the last day of the Term or, if applicable, the last day of the
Renewal Term or any extension; and (iv) if Vice President’s employment is
terminated for any other reason, the date the Notice of Termination is given.

 

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11.           Compensation upon Termination or
During Disability.  Upon termination of Vice President’s employment
pursuant to the terms of this Agreement or during any period of Vice President’s
physical or mental disability, Vice President shall be paid as follows:

 

(a)           The Vice President shall continue to receive his
annual base salary at the rate then in effect during any Disability Period
provided, however, that such payments shall not continue beyond the earlier of (i) the
end of the Term or, if applicable, the Renewal Term, or (ii) the Date of
Termination of this Agreement by the Company pursuant to Section 10(e)(ii),
provided that payments so made to Vice President shall be reduced by the sum of
the amounts, if any, payable to Vice President under any disability benefit
plans of the Company and which were not previously applied to reduce any such
payment.  In addition the Company shall reimburse Vice President for any
theretofore unreimbursed expenses which were incurred prior to the commencement
of the Disability Period.

 

(b)           If Vice President’s employment is
terminated by his death, the Company shall pay to Vice President’s designated
beneficiaries, or if he leaves no designated beneficiaries, to his estate, his
annual base salary through the date of Vice President’s death at the rate then
in effect and any theretofore unreimbursed expenses and the Company shall have
no further obligations to Vice President under this Agreement.

 

(c)           If Vice President’s employment shall be terminated for
Cause, the Company shall pay Vice President his annual base salary (but not the
compensation described in Section 4(c)) through the Date of Termination at
the rate in effect at the time Notice of Termination is given and the Company
shall have no further obligations to Vice President under this Agreement.

 

(d)           If 
the Company shall (i) terminate Vice President’s employment other
than pursuant to Section 10(a), 10(b) or 10(c) hereof; (ii) assign
to Vice President any duties materially inconsistent with Vice President’s
position in the Company; or (iii) assign to Vice President a title, office
or status which is inconsistent than that established herein (unless in the
nature of a promotion) then, in addition to reimbursement of  Vice President for any theretofore unreimbursed
expenses, the Company shall pay Vice President, with no offset, an amount equal
to the greater of (a) Vice President’s annual base salary at the rate in
effect at the time Notice of Termination is given for the unexpired Term or, if
applicable, Renewal Term of this Agreement and payment for any accrued, but
unused vacation days hereunder; or (b) six (6) months of Vice
President’s annual base salary at the rate in effect at the time Notice of
Termination is given and payment for any accrued, but untaken vacation days
hereunder.  Such payments to be made in a
single lump sum within ten (10) days of the termination of this Agreement.

 

(e)           If Vice President shall terminate his
employment pursuant to Section 10(d) of this Agreement, the Company
shall pay Vice President, in addition to reimbursement of any theretofore
unreimbursed expenses, his full salary through the Date of Termination at the
rate in effect on the date that Notice of Termination is received by the
Company,

 

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plus payment for any accrued, but untaken vacation
days hereunder and the Company shall have no further obligation to Vice
President under this Agreement.

 

12.           Change in Control Severance
Benefit.  If within twelve (12)
months after the occurrence of a Change in Control (as defined below) (i) the
Company terminates Vice President’s employment for any reason; or (ii) Vice
President resigns at any time after any diminution in Vice President’s job
title, duties or compensation or the relocation of Vice President, without Vice
President’s consent, to an office in a county that does not abut Tarrant
County, Texas, the Company shall pay to Vice President, in a lump sum, three
times Vice President’s annual salary in effect as of the date of Vice President’s
termination or resignation and three times the sum of prior year bonuses paid
to Vice President and shall continue to provide to Vice President, Vice
President’s spouse and dependents, for a period of three years after such
termination or resignation, the right to participate in any health and dental
plans that the Company may maintain for its employees, on the same basis as
participation by such employees.

 

A “Change in Control”
shall mean:

 

(a) any
consolidation, merger or share exchange of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of the
Company’s common stock would be converted into cash, securities or other
property, other than a consolidation, merger or share exchange of the Company in
which the holders of the Company’s common stock immediately prior to such
transaction have the same proportionate ownership of common stock of the
surviving corporation immediately after such transaction; (b) any sale,
lease, exchange or other transfer (excluding transfer by way of pledge or
hypothecation) in one transaction or a series of related transactions, of all
or substantially all of the assets of the Company; (c) the stockholders of
the Company approve any plan or proposal for the liquidation or dissolution of
the Company; (d) the cessation of control (by virtue of their not
constituting a majority of directors) of the Board by the individuals (the “Continuing Directors”)
who (x) at the Effective Date were directors or (y) become directors
after the Effective Date and whose election or nomination for election by the
Company’s stockholders was approved by a vote of at least two-thirds of the
directors then in office who were directors at the Effective Date or whose
election or nomination for election was previously so approved; (e) the
acquisition of beneficial ownership (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934) of an aggregate of 50% or more of the voting power of the
Company’s outstanding voting securities by any person or group (as such term is
used in Rule 13d-5 under the Securities Exchange Act of 1934) who
beneficially owned less than 50%
of the voting power of the Company’s outstanding voting securities on the
Effective Date of this Plan; provided, however, that
notwithstanding the foregoing, an acquisition shall not constitute a Change in
Control hereunder if the acquirer is (x) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company and acting in
such capacity, (y) a subsidiary of the Company or a corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of voting securities of the Company or (z) any
other person whose acquisition of shares of voting securities is approved in
advance by a majority of the Continuing Directors; or (f) in a Title 11
bankruptcy proceeding, the appointment of a trustee or the conversion of a case
involving the Company to a case under Chapter 7.

 

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Anything in this Section 12
to the contrary notwithstanding, in the event it shall be determined that any
payment or distribution made, or benefit provided, by the Company to or for the
benefit of Vice President (whether paid or payable or distributed or
distributable or provided pursuant to the terms hereof or otherwise) would
constitute a “parachute payment” as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the “Code”), then the lump sum
payment payable pursuant to this Section 12 shall be reduced so that the
aggregate present value of all payments in the nature of compensation to (or
for the benefit of) Vice President which are contingent on a change of control
(as defined in Code Section 280G(b)(2)(A)) is One Dollar ($1.00) less than
the amount which Vice President could receive without being considered to have
received any parachute payment (the amount of this reduction in the lump sum
severance payment is referred to herein as the “Excess Amount”).  The determination of the amount of any
reduction required by this Section 12 shall be made by an independent
accounting firm (other than the Company’s independent accounting firm) selected
by the Company and acceptable to Vice President, and such determination shall
be conclusive and binding on the parties hereto.

 

13.           Defined Terms.  For
purposes of this Agreement, the terms set forth in this Agreement shall have
the following meanings:

 

(a)           “Affiliate”
shall mean any individual, corporation, unincorporated organization, trust or
other form of entity controlling, controlled by or under common control with
the Company.  For purposes of this definition, “control” (including “controlled
by” and “under common control with”) means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such individual, corporation, unincorporated organization, trust or other form
of entity, whether through the ownership of voting securities or otherwise.

 

(b)           “Person” shall mean an individual, a
corporation, a partnership, an association, a joint-stock company, a trust, an
incorporated organization or a government or political subdivision thereof.

 

14.           Waiver. No waiver of any
provision of this Agreement shall be deemed, or shall constitute, a waiver of
any other provision, whether or not similar, nor shall any waiver constitute a
waiver of any continuing or succeeding breach of such provision, a waiver of
the provision itself, or a waiver of any right under this Agreement.  No
waiver shall be binding unless executed in writing by the Party making the
waiver.

 

15.           Limitation of Rights.  Nothing in this Agreement, except as
specifically stated herein, is intended to confer any rights or remedies under
or by reason of this Agreement on any persons other than the Parties and their
respective permitted successors and assigns and other legal representatives,
nor is anything in this Agreement intended to relieve or discharge the
obligation or liability of any third persons to any Party to this Agreement,
nor shall any provision give any third persons any right of subrogation or
action over against any Party to this Agreement.

 

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16.           Notices.  During the Employment Period of this Agreement
Vice President shall give the Company immediate notice of any change of
address.  All notices given in connection
with this Agreement shall be in writing and shall be delivered either by
personal delivery, by telecopy or similar facsimile means, by certified or
registered mail (postage prepaid and return receipt requested), or by express
courier or delivery service, addressed to the applicable Party hereto at the
following address:

 

If to the Company:

 

Cano Petroleum, Inc.

309 West Seventh Street

Suite 1600

Fort Worth, Texas 76102
 Attention: S. Jeffery Johnson

Telecopy No.: 817-698-0761:

 

If to Vice
President:

 

Patrick M. McKinney

722 Ashleigh Lane

Southlake, TX  76092

Telephone:  817-424-2489

Telecopy No.:

 

or such other address and
number as either Party shall have previously designated by written notice given
to the other Party in the manner hereinabove set forth.  Notices shall be
deemed given when received, if sent by telecopy or similar facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by telecopy or other facsimile means); and when
delivered and receipted for (or upon the date of attempted delivery where
delivery is refused), if hand-delivered, sent by express courier or delivery
service, or sent by certified or registered mail.

 

17.           Inconsistent Obligations. Vice
President represents and warrants that he is not subject to any undisclosed
obligations inconsistent with those of this Agreement and expressly warrants
that he is not subject to a non-competition agreement with any third-party that
is inconsistent with the obligations set forth herein.

 

18.           Code Section 409A; Delay of
Payments.  The terms of this
Agreement have been designed to comply with the requirements of Code Section 409A,
as amended, where applicable, and shall be interpreted and administered in a
manner consistent with such intent. 
Notwithstanding anything to the contrary in this Agreement, (i) if
upon the date of Vice President’s termination of employment with the Company,
Vice President is a “specified employee” within the meaning of Code Section 409A,
and the deferral of any amounts otherwise payable under this Agreement as a
result of Vice President’s termination of employment is necessary in order to
prevent any accelerated or additional tax to Vice President under Code Section 409A,
then the Company will defer the payment of any such amounts hereunder until the

 

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date that is six (6) months
and one day following the date of Vice President’s termination of employment
with the Company at which time any such delayed amounts will be paid to Vice
President in a single lump sum, with interest from the date otherwise payable
at the prime rate as published in The Wall Street Journal on the date of Vice
President’s termination of employment with the Company, and (ii) if any
other payments of money or other benefits due to Vice President hereunder could
cause the application of an accelerated or additional tax under Code Section 409A,
such payments or other benefits shall be deferred if deferral will make such
payment or other benefits compliant under Code Section 409A.

 

19.           Entirety and Amendments. This
instrument and the instruments referred to herein embody the entire agreement
between the Parties, supersede all prior agreements and understandings, if any,
relating to the subject matter hereof, and may be amended only by an instrument
in writing executed by all Parties, and supplemented only by documents delivered
or to be delivered in accordance with the express terms hereof.

 

20.           Successors and Assigns. 
This Agreement will be binding upon and inure to the benefit of the Parties
hereto and any successors in interest to the Company, but neither this
Agreement nor any rights hereunder may be assigned by Vice President or by the
Company, except that the Company may assign this Agreement to an Affiliate or
successor in interest.

 

21.           Governing Law And Venue. 
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Texas applicable to agreements made and to be
performed entirely in Texas, exclusive of any provisions of Texas law which
would apply the law of another jurisdiction.  The obligations and
undertakings of each of the Parties to this Agreement shall be performable in
Tarrant County, Texas, and each Party agrees that if any action at law or in
equity is necessary by the Company or Vice President to enforce or interpret
the terms of this Agreement, venue shall be in Tarrant County, Texas.

 

22.           Cumulative Remedies.  No
remedy herein conferred upon any Party is intended to be exclusive of any other
benefits or remedy, and each and every such remedy shall be cumulative and
shall be in addition to every other benefits or remedy given hereunder or now
or hereafter existing at law or in equity or by statute or otherwise.  No
single or partial exercise by any Party of any right, power or remedy hereunder
shall preclude any other or further exercise thereof.

 

23.           Multiple Counterparts. This
Agreement may be executed and delivered by facsimile and in a number of
identical counterparts, each of which constitute collectively, one agreement;
but in making proof of this Agreement, it shall not be necessary to produce or
account for more than one counterpart. 
This Agreement may be executed and delivered via facsimile.

 

24.           Descriptive Headings. 
The headings, captions and arrangements used in this Agreement are for
convenience only and shall not be deemed to limit, amplify or modify the terms
of this Agreement, nor affect the meanings hereof.

 

10

 

25.           Severability.  The parties intend all provisions of this
Agreement to be enforced to the fullest extent permitted by law.  Accordingly, if any provision of this
Agreement is held illegal, invalid, or unenforceable under present or future
law, such provision shall be fully severable, this Agreement shall be construed
and enforced as if such illegal, invalid, or unenforceable provision were never
a part hereof, and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance.

 

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Signatures

 

To evidence the
binding effect of the covenants and agreements described above, the Parties
hereto have executed this Agreement effective as of the Effective Date.

 

	
  

  	
  THE COMPANY:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  CEO and Chairman

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  VICE PRESIDENT:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Patrick M. McKinney

  	
   

  
	
   

  	
   

  	
  Patrick M. McKinney

  	
   

  

 

12EXHIBIT
10.74

 

FIRST
AMENDMENT TO EMPLOYMENT AGREEMENT

 

THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this “Amendment”)
is made and entered into by and between Cano
Petroleum Inc., a Delaware corporation with its principal executive
offices in Fort Worth, Texas (the “Company”),
and Patrick M. McKinney, an
individual currently residing in Tarrant County, Texas (“Vice President,”
collectively, the “Parties”), effective as of the 9th day of November, 2006
(the “Amendment Effective Date”).

 

WHEREAS, the Company and Vice President entered into that
certain Employment Agreement dated as of June 1, 2006, (the “Agreement”);
and

 

WHEREAS, the Company and Vice President now desire to
amend, alter, modify and change the terms and provisions of the Agreement, as
follows.

 

NOW THEREFORE, for and in consideration of the mutual
benefits to be obtained hereunder and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged and confessed, the
Company and Vice President do hereby agree to amend, alter, modify and change
the Agreement, effective prospectively, as of the Amendment Effective Date as
follows:

 

1.                                      Each
reference to “Vice President” in the Agreement is deleted throughout the
Agreement and the term “Senior Vice President” is substituted in place and in
lieu thereof.

 

2.                                      Section 1.
Employment. shall be deleted in its entirety and the following
substituted in place and in lieu thereof:

 

1.                                       Employment.  The
Company hereby employs Senior Vice President in the capacity of Senior Vice
President — Engineering and Operations, and Senior Vice President hereby
agrees to accept such employment by the Company, upon the terms and conditions
stated in this Agreement.

 

3.                                      Section 4.
(a)  Compensation. shall be deleted in its entirety and the following
substituted in place and in lieu thereof:

 

(a)                                  Salary:  The Company shall pay Senior Vice President
for his services, a base salary, on an annualized basis, of $185,000.00 (One
Hundred Eighty-Five Thousand Dollars) per annum for the period from the
Effective Date through November 15, 2006, and a base salary, on an
annualized basis, of $200,000.00 (Two Hundred Thousand Dollars) per annum for
the period beginning on November 16, 2006, which salary shall be payable
by the Company in substantially equal installments on the Company’s normal
payroll dates.  All applicable taxes on
the base salary will be withheld in accordance with applicable federal, state
and local taxation guidelines.

 

1

 

4.                                      Section 4.
(c)  Compensation. shall be deleted in its entirety and the
following substituted in place and in lieu thereof:

 

(c)                                  Bonus: In addition to the base salary described in paragraph
4(a) above, Vice President shall be eligible for periodic cash bonuses in
an amount up to 100% of the then base salary and/or stock bonuses at the
discretion of the Board of Directors of the Company.

 

5.                                      Section 4.
(e)  Compensation. shall be deleted in its entirety and the
following substituted in place and in lieu thereof:

 

(e)                                  Raises:  Vice President
may receive periodic increases in the base salary at the discretion of the
Board of Directors of the Company, which increased base salary shall become the
base salary for purposes of this Agreement.

 

Except
as specifically amended, altered, modified and changed hereby and heretofore,
the Agreement remains in full force and effect as originally written.

 

Signatures

 

To evidence the binding effect of the covenants and agreements
described above, the Parties hereto have executed this Amendment effective as
of the date first above written.

 

 

	
   

  	
  THE COMPANY:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  Chairman and Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  VICE PRESIDENT:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Patrick M. McKinney

  
	
   

  	
   

  	
  Patrick M. McKinney

  	
   

  

 

2

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