Cano Petroleum Finalizes Purchase of Square One Energy for $8 Million; Cano to Begin Pilot Waterflood Operation on its Newly Acquired Texas Field

FORT WORTH, Texas, March 31 /PRNewswire-FirstCall/ -- Cano Petroleum Inc. (BULLETIN BOARD: CAOP) has closed on its $8 million acquisition of Square One Energy, a central Texas-based oil and gas operating company, to significantly boost the company's oil reserves and increase its production through enhanced recovery technology.

As previously announced, the deal was funded with $4 million in cash and $4 million in equity, consisting of 888,888 shares of Cano common stock valued at $4.50 per share. The stock will be restricted for 12 months, after which restrictions will be phased out at the rate of approximately 49,000 shares a month.

Square One Energy's assets include a 100% working interest in 10,300 acres of mature oil fields in Erath, Comanche and Eastland counties, with current net production of approximately 70 barrels of oil per day from 34 wells at 2,600-foot depth in the Duke sand.

Cano's third-party engineers, using SEC price decks, have concluded that there are 1,065,000 barrels of proved oil reserves in the field, which Cano will now refer to as the Desdemona Unit. Cano estimates the field contains more than 40 million barrels of probable oil reserves. The Desdemona Unit had approximately 100 million barrels of original oil in place and, to date, has produced approximately 17 million barrels of oil in primary production.

"Through the Square One Energy acquisition, Cano Petroleum will apply enhanced oil recovery efforts on its first field in Texas, in line with our overall, domestic growth strategy," said Jeff Johnson, chairman and chief executive officer of Cano. "The Desdemona Unit is rich in oil-producing history, and we believe that our advanced technology will make this field prosperous again. We look forward to waterflooding this field for the first time and evaluating further enhanced oil recovery applications."

Cano anticipates that the initial pilot waterflood operation will begin within 90 days and will focus on converting producing wells to injectors and reactivating wells. No new drilling will occur in the pilot phase. Cano expects to have results of the waterflood test within six to eight months after commencing operations.

In addition to the 70 barrels of oil equivalent per day, the lease is currently producing 400,000 cubic feet per day (400 Mcfpd).

Cano also acquired other tangible assets, including 28 acres of land, a gas processing plant, production equipment, a field office and an office building. The purchase also includes rights to explore and produce oil and gas from Barnett Shale formations on the property, which Cano does not have immediate plans to develop.

ABOUT CANO PETROLEUM:

Cano Petroleum Inc. is an independent Texas-based energy producer with properties in the mid-continent region of the United States. Led by an experienced management team, Cano's primary focus is on increasing domestic production from proven fields using enhanced recovery methods. Cano is traded under the ticker symbol CAOP on the NASD Bulletin Board. Additional information is available at http://www.canopetro.com/ .

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS:

Except for historical information contained herein, the statements in this Press Release are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, volatility of natural resource prices, product demand, market competition, and risks inherent in our operations. These and other risks are described in our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

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