Document:

Exhibit 10.1

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
Michael J. Ricketts, an individual currently residing in
Tarrant County, Texas (“Vice President”), as of the 1st day of July, 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 and
Principal Accounting Officer, 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 June 30, 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 Senior Vice President and Chief Financial Officer of
the Company.  Vice President shall devote
his full working time, efforts and energies to the 

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performance of his duties hereunder, which shall
include managing the business development affairs of the Company.

4.             Compensation.

(a)           Salary:  The Company shall pay Vice President for his
services, a base salary, on an annualized basis, of $175,000.00 (One Hundred
Seventy-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)           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 recommendation of the Chief Executive Officer and the approval of the Board
of Directors of the Company.

(c)           Raises:  Vice President may receive periodic increases
in the base salary at the recommendation of the Chief Executive Officer and the
approval Board of Directors 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 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 

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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:

(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.

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(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 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 

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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.

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.

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(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(b)) 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, 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.

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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.

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.

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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.

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.

Burnett Plaza

801 Cherry St., Suite 3200, Unit 25

Fort Worth, Texas 76102
Attention: S. Jeffery Johnson
Telecopy No.: 817-698-0761:

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If to Vice President:

Michael
J. Ricketts

554 Bear Ridge

Keller, Texas 76248

Telephone:  817-431-9763

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 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.

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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.

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/ Michael J. Ricketts

  
	
   

  	
   

  	
   

  	
   

  	
  Michael J. Ricketts

  

 

 11Exhibit
10.2

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,

Morris B. Smith

(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 5,000 shares (the “Awarded Shares”). 
The Date of Grant of this Award is August 11, 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 first 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 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

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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, which is annexed hereto, 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).

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 

 3
 

 

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.

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.

801 Cherry Street, Unit 25, Suite 3200

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 

 4
 

 

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 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:

  	
  CEO and Chairman

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  

  	
   

  	
   

  	
  PARTICIPANT:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  /s/ Morris B. Smith

  	
   

  
	
   

  	
   

  	
   

  	
  Signature

  	
   

  

 

	
  

  	
   

  	
   

  	
  Name:

  	
  MORRIS B. SMITH

  	
   

  
	
   

  	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 6

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