Cano Petroleum Achieves Improved Recovery Rates in Extended Testing at Nowata, Initiates Testing at Davenport and Discusses Strategy at Putnam.

FORT WORTH, Texas -- Cano Petroleum, Inc. (Amex:CFW) announced today that extended laboratory testing to evaluate enhanced oil recovery (EOR) of its Nowata Field has yielded significantly increased recovery rates. Further testing of potential flood formulations has increased ASP (alkaline-surfactant-polymer) coreflood recovery to 24% of the original oil in place (OOIP), compared to the Phase III results of 18% of OOIP. While additional testing continues, construction of the ASP pilot area and facilities is underway at Nowata.

Jeff Johnson, Cano's Chairman and CEO, stated, "These improved results underscore the importance of conducting comprehensive tests in the lab before making a significant investment in the field. Compared to the field, experimentation in the lab is cheap, improves the potential for recovery success and reduces the financial risk. More importantly, the decision to extend the testing at Nowata beyond Phase III occurred as a result of the knowledge and field experience of our in-house engineering staff working effectively with the laboratory expertise of our consultants."

Surfactant-Polymer (SP) testing of core samples taken from Cano's Davenport Unit is currently underway. Initial results are expected to be available in the second calendar quarter of 2006. The Davenport field, located in Lincoln County, Okla., has produced approximately 22 million barrels through primary and secondary recovery of an estimated 58 million barrels of OOIP. Proved reserves are estimated at 484 Mboe with probable reserves (anticipated to be recovered through SP flooding) estimated at 10,527 Mboe.

Cano has acquired a number of leases in an undisclosed area in Texas which was the subject of a successful pilot polymer flood in the 1980s. As the Company is continuing to lease in this area, it is referred to here, and in previous communications, as the Putnam field. Cano intends to execute a pilot program in this area where a surfactant-polymer flood will be injected and then produced through a horizontal well bore. The latest in SP technology will be coupled with horizontal drilling techniques to most effectively exploit the benefits of both.

Johnson added, "We are very excited about ASP and SP flooding as part of our overall Enhanced Oil Recovery (EOR) business model. While these flooding technologies have already proven successful worldwide, further refinements in the technology and its applications are inevitable as their deployment becomes more widespread. Cano will remain aggressive in its strategy to acquire assets that are suitable for surfactant-polymer flooding and other EOR applications."

SP and ASP flooding are enhanced oil recovery techniques that can be employed to recover additional oil over and above primary and secondary recovery methods. Low concentrations of surfactants, polymers and other additives are added to the waterflood operations already in place, to "clean" stubborn or hard to reach oil from the reservoir, much like soap in a greasy dish pan.

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 trades on the American Stock Exchange under the ticker symbol CFW. Additional information is available at 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.

Cautionary Notes to Investors - The Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. Cano uses "non-proved reserves" in this news release, which the SEC's guidelines strictly prohibit it from including in filings with the SEC. Investors are urged to also consider closely the disclosure in Cano's Form 10-KSB for the fiscal year ended June 30, 2005, available from Cano by calling 800-769-7205. This form also can be obtained from the SEC at www.sec.gov.