Cano Petroleum Provides an Operational Update and Discusses Covenant Compliance.

FORT WORTH, Texas -- Cano Petroleum, Inc. ("Cano") (AMEX:CFW) today provided an operational update, discussed impending lender covenant issues and rescheduled its earnings call.

Operational Update

After the closing of its latest acquisition in the Panhandle Field announced on May 1, 2006, Cano stated that its current production is approximately 1,550 net barrels of oil equivalent per day. The Company indicated that it remains on schedule to begin pilot programs for surfactant polymer injection at its Corsicana and Nowata Fields in September, 2006 and November 2006, respectively. The Company also announced that re-completion operations in its Corsicana Field have yielded positive results and that further production testing is ongoing. Additionally, the Company indicated that a re-completion and stimulation (fracing) operation in its Desdemona Field has resulted in initial 48 hour flow rates of approximately 850,000 cubic feet per day of gas production on a 17/64 choke from the previously un-produced Duffer formation at an approximate depth of 3,500' with a flowing tubing pressure of approximately 950 lbs. Additional re-entry and re-completion operations in the Desdemona Field in the Duffer formation are also ongoing. The Company noted that surface facilities construction for its waterflood program in its Desdemona Field is progressing on schedule, with full injection operations anticipated to commence prior to September 1, 2006.

Covenant Compliance

The Company indicated that it has been engaged in discussions with its senior and subordinated lenders regarding the modification of an impending payment obligation and other covenants. While there can be no assurance that the lenders will agree to adjust these requirements, based upon the most recent discussions, the Company is optimistic that the discussions will result in mutually acceptable modifications.

Earnings Call

The Company will re-schedule its earnings and operational update call next week.

Management Comments

Jeff Johnson, Cano's Chairman and CEO, stated, "We continue to be pleased with the Company's progress and have turned a significant corner during the last quarter, producing net operating income for the first time. The re-completion results being seen in our Corsicana and Desdemona Fields are very encouraging and we remain enthusiastic about beginning our surfactant polymer injection and waterflood programs."

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.

Safe-Harbor Statement -- Except for the historical information contained herein, the matters set forth in this news release are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The company intends that all such statements be subject to the "safe-harbor" provisions of those Acts. Many important risks, factors and conditions may cause the company's actual results to differ materially from those discussed in any such forward-looking statement. These risks include, but are not limited to, estimates or forecasts of reserves, estimates or forecasts of production, future commodity prices, exchange rates, interest rates, geological and political risks, drilling risks, product demand, transportation restrictions, the ability of Cano Petroleum, Inc. to obtain additional capital, and other risks and uncertainties described in the company's filings with the Securities and Exchange Commission. The historical results achieved by the company are not necessarily indicative of its future prospects. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.