Document:

EXHIBIT
10.2

SUPPLEMENT NO. 2 dated as of March 6, 2007 (the “Supplement”),
to the Guaranty Agreement dated as of November 29, 2005 (as heretofore amended,
supplemented or otherwise modified from time to time, the “Guaranty Agreement”), among each
of the subsidiaries party thereto (each such subsidiary individually, a “Guarantor”
and collectively, the “Guarantors”) of CANO PETROLEUM,
INC., a Delaware corporation (the “Borrower”) in favor of UNION BANK
OF CALIFORNIA, N.A., as Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).

A.            Reference is made to the Credit Agreement dated as of
November 29, 2005 (as heretofore and hereafter amended, supplemented or
otherwise modified from time to time, the “Credit Agreement”), among the
Borrower, the lenders from time to time party thereto (the “Lenders”), and the Administrative
Agent.

B.            Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to such terms in the Guaranty Agreement
and the Credit Agreement.

C.            The Guarantors have entered into the Guaranty Agreement
in order to induce the Lenders to make Advances and the Issuing Lender to issue
Letters of Credit.  Pursuant to
Section 6.15 of the Credit Agreement, the Subsidiaries of the Borrower are
required to enter into the Guaranty Agreement as Guarantors.  Section 16 of the Guaranty Agreement
provides that additional Subsidiaries of the Borrower may become Guarantors
under the Guaranty Agreement by execution and delivery of an instrument in the
form of this Supplement.  The undersigned
Subsidiary of the Borrower (the “New Guarantor”) is executing this
Supplement in accordance with the requirements of the Credit Agreement to
become a Guarantor under the Guaranty Agreement in order to induce the Lenders
to make additional Advances and the Issuing Lender to issue additional Letters
of Credit and as consideration for Advances previously made and Letters of
Credit previously issued.

Accordingly, the Administrative Agent and the New
Guarantor agree as follows:

SECTION 1.           In accordance with Section 16 of
the Guaranty Agreement, the New Guarantor by its signature below becomes a
Guarantor under the Guaranty Agreement with the same force and effect as if
originally named therein as a Guarantor and the New Guarantor hereby
(a) agrees to all the terms and provisions of the Guaranty Agreement
applicable to it as a Guarantor thereunder and (b) represents and warrants
that the representations and warranties made by it as a Guarantor thereunder
are true and correct in all material respects on and as of the date
hereof.  Each reference to a “Guarantor”
in the Guaranty Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement is hereby incorporated
herein by reference.

SECTION 2.           The New Guarantor represents and
warrants to the Administrative Agent and the other Beneficiaries that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general application
(regardless of whether enforcement is sought in a proceeding in equity or at
law)).

SECTION 3.           This Supplement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract.  This Supplement shall become effective when
the Administrative Agent shall have received counterparts of this Supplement
that, when taken together, bear the signatures of the New Guarantor and the
Administrative Agent. Delivery of an executed signature page to this Supplement
by fax transmission shall be as effective as delivery of a manually executed
counterpart of this Supplement.

SECTION 4.           Except as expressly supplemented
hereby, the Guaranty Agreement shall remain in full force and effect.

SECTION 5.           THIS SUPPLEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.  The New Guarantor hereby irrevocably submits
to the jurisdiction of any Texas state or federal court sitting in Dallas,
Texas in any action or proceeding arising out of or relating to this Supplement
or the Guaranty Agreement and the other Loan Documents, and the New Guarantor
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such court.  The New Guarantor hereby irrevocably waives,
to the fullest extent it may effectively do so, any right it may have to the
defense of an inconvenient forum to the maintenance of such action or proceeding.  The New Guarantor hereby agrees that service
of copies of the summons and complaint and any other process which may be
served in any such action or proceeding may be made by mailing or delivering a
copy of such process to such Guarantor at its address set forth on the
signature page hereof.  The New Guarantor
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law. 
Nothing in this Section shall affect the rights of any Beneficiary to
serve legal process in any other manner permitted by the law or affect the
right of any Beneficiary to bring any action or proceeding against the New
Guarantor or its Property in the courts of any other jurisdiction.

SECTION 6.           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and in the Guaranty Agreement shall not
in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision hereof in a particular jurisdiction shall
not in and of itself affect the validity of such provision in any other
jurisdiction).  The parties hereto shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.

SECTION 7.           All communications and notices
hereunder shall be in writing and given as provided in Section 10 of the
Guaranty Agreement.  All communications
and notices hereunder to the New Guarantor shall be given to it at the address
set forth under its signature below.

SECTION 8.           The New Guarantor agrees to reimburse
the Administrative Agent for its reasonable out-of-pocket expenses in
connection with this Supplement, including the fees, disbursements and other
charges of counsel for the Administrative Agent.

 2
 

SECTION
9.           PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE,
AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE
IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY
TO BE BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.

THE RIGHTS AND OBLIGATIONS OF THE
PARTIES TO AN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED
SOLELY FROM THE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE
PARTIES ARE SUPERSEDED BY AND MERGED INTO THIS GURANTY.  THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.

IN WITNESS WHEREOF, the New Guarantor and the
Administrative Agent have duly executed this Supplement to the Guaranty
Agreement as of the day and year first above written.

	
   

  	
  NEW GUARANTOR:

  
	
   

  	
  CANO PETRO OF
  NEW MEXICO, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
  S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
  Address of New
  Guarantor:

  
	
   

  	
  801 Cherry
  Street, Unit 25

  
	
   

  	
  Suite 3200

  
	
   

  	
  Fort Worth, Texas
  76102

  
	
   

  	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF
  CALIFORNIA, N.A., as Administrative Agent

  
	
   

  
	
   

  	
  By:

  	
  /s/ Kimberly Coil

  
	
   

  	
   

  	
  Kimberly Coil

  
	
   

  	
   

  	
  Vice President

  
						

 

 3Exhibit
10.3

SUPPLEMENT NO. 2 
dated as of March 6, 2007 (the “Supplement”), to the Security
Agreement dated as of November 29, 2005 (as heretofore amended, supplemented or
otherwise modified from time to time, the “Security Agreement”), by and
among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”), each
subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and Union Bank of California, N.A. as
Collateral Trustee under the Collateral Trust Agreement (as hereinafter
defined) for the benefit of itself and the Secured Parties (as hereinafter
defined).

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

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

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

B.            In connection with the Senior Credit Agreement, the
Senior Agent, the Senior Lenders, the Collateral Trustee, the Borrower, and
other parties thereto, have entered into that certain Collateral Trust and
Intercreditor Agreement dated as November 29, 2005 (as it may be amended,
restated, or otherwise modified from time to time, the “Collateral Trust
Agreement”), to among other things, appoint the Collateral Trustee as
collateral trustee for all of the Secured Parties under the security documents
executed in connection with the Credit Agreement, including the Security
Agreement, and set forth the rights and remedies of the Secured Parties with
respect thereto.

C.            Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to such terms in the Security Agreement
and the Senior Credit Agreement.

D.            The Grantors have entered into the Security Agreement in
order to induce the Senior Lenders and to make loans and the Issuing Lender to
issue letters of credit under the Senior Credit Agreement.  Pursuant to Section 6.15 of the Senior
Credit Agreement, each Subsidiary of the Borrower that was not in existence on
the date of the Senior Credit Agreement is required to enter into the Security Agreement
as a Grantor upon becoming a Subsidiary. 
Section 17(j) of the Security Agreement provides that additional
Subsidiaries of the Borrower may become Grantors under the Security Agreement
by execution and delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary of the Borrower
(the “New Grantor”) is executing this Supplement in accordance with the
requirements of the Senior Credit Agreement to become a Grantor under the
Security Agreement in order to induce the Senior Lenders to make additional
loans and the Issuing Lender to issue additional letters of credit and as
consideration for loans previously made and letters of credit previously
issued.

 1
 

Accordingly, the Collateral Trustee and the New
Grantor agree as follows:

SECTION 1.           In accordance with Section 17(j)
of the Security Agreement, the New Grantor by its signature below becomes a
Grantor under the Security Agreement with the same force and effect as if
originally named therein as a Grantor and the New Grantor hereby agrees
(a) to all the terms and provisions of the Security Agreement applicable
to it as a Grantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Grantor thereunder are true and
correct on and as of the date hereof in all material respects.  In furtherance of the foregoing, the New
Grantor, as security for the payment and performance in full of the Secured
Obligations (as defined in the Security Agreement), does hereby create and
grant to the Collateral Trustee, its successors and assigns, for the benefit of
the Secured Parties, their successors and assigns, a continuing security
interest in and lien on all of the New Grantor’s right, title and interest in
and to the Collateral (as defined in the Security Agreement) of the New
Grantor.  Each reference to a “Grantor”
in the Security Agreement shall be deemed to include the New Grantor.  The Security Agreement is hereby incorporated
herein by reference.

SECTION 2.           The New Grantor represents and
warrants to the Collateral Trustee and the other Secured Parties that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).

SECTION 3.           This Supplement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract.  This Supplement shall become effective when
the Collateral Trustee shall have received counterparts of this Supplement
that, when taken together, bear the signatures of the New Grantor and the
Collateral Trustee.  Delivery of an
executed signature page to this Supplement by facsimile transmission shall be
as effective as delivery of a manually signed counterpart of this Supplement.

SECTION 4.           The New Grantor hereby represents and
warrants that set forth on Schedule 1 attached hereto are (a) its sole
jurisdiction of formation and type of organization, (b) the location of all
records concerning its Accounts, General Intangibles, or any other Collateral,
(c) its federal tax identification number and the organizational number, and
(d) all names used by it during the last five years prior to the date of this
Supplement.

SECTION 5.           Except as expressly supplemented hereby,
the Security Agreement shall remain in full force and effect.

SECTION 6.           THIS SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS.

 2
 

SECTION 7.           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, neither party hereto shall be required to comply
with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not
in any way be affected or impaired.  The
parties hereto shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.

SECTION 8.           All communications and notices
hereunder shall be in writing and given as provided in the Security
Agreement.  All communications and
notices hereunder to the New Grantor shall be given to it at the address set
forth under its signature hereto.

SECTION 9.           The New Grantor agrees to reimburse
the Collateral Trustee for its reasonable out-of-pocket expenses in connection
with this Supplement, including the reasonable fees, other charges and
disbursements of counsel for the Collateral Trustee.

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

THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.

[SIGNATURES
BEGIN ON NEXT PAGE]

 3
 

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

	
  

  	
   

  	
   

  	
  NEW GRANTOR:

  	
   

  
	
   

  	
   

  	
   

  	
  CANO PETRO OF NEW
  MEXICO, INC.

  	
   

  
	
   

  	
   

  	
   

  	
  By: 

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
  Name:

  	
   S. Jeffrey
  Johnson

  
	
   

  	
   

  	
   

  	
  Title:

  	
   President

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Address of New Guarantor:

  
	
   

  	
   

  	
   

  	
  801 Cherry Street, Unit 25

  
	
   

  	
   

  	
   

  	
  Suite 3200

  
	
   

  	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  	
  COLLATERAL TRUSTEE:

  
	
   

  	
   

  	
   

  	
  UNION BANK OF
  CALIFORNIA, N.A., as Administrative Agent

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Kimberly Coil

  
	
   

  	
   

  	
   

  	
   

  	
  Kimberly Coil

  
	
   

  	
   

  	
   

  	
   

  	
  Vice President

  
								

 

 4

Exhibit 10.3

Schedule 1

Supplement No. 2

to the Security Agreement

	
  New Grantor:

  	
   

  	
  Cano Petro of New Mexico, Inc.

  
	
  Jurisdiction of Formation /
  Filing:

  	
   

  	
  Texas

  
	
  Type of Organization:

  	
   

  	
  corporation

  
	
  Address where records for 

  	
   

  	
   

  
	
  Collateral are kept:

  	
   

  	
  801 Cherry Street, Unit 25 

  Suite 3200 

  Fort Worth, Texas 76102 

  
	
  Organizational Number:

  	
   

  	
  TX 800782069

  
	
  Federal Tax Identification
  Number:

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

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