Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves provided they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking

statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations as a result of many factors, including, but not limited to the volatility in prices for crude oil and natural gas, future commodity prices for derivative hedging contracts, interest rates, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product demand, market competition, interruption in production, our ability to obtain additional capital, and the success of waterflooding and enhanced oil recovery techniques.

Statements in this Quarterly Report on Form 10-Q regarding Cano's strategy, risk factors, capital budget, projected expenditures, liquidity and capital resources, and drilling and development plans reflect Cano's current plans for the fiscal year ending June 30, 2010 as a stand-alone entity and do not take into account the impact of the proposed merger (the "Merger") with Resaca Exploitation, Inc. ("Resaca"), except where such statements specifically relate to the proposed Merger.

You should read the following discussion and analysis in conjunction with the consolidated financial statements of Cano and subsidiaries and notes thereto, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of management.

Overview

We are an independent oil and natural gas company. Our strategy is to exploit our current undeveloped reserves and acquire, where economically prudent, assets suitable for enhanced oil recovery at a low cost. We intend to convert our proved undeveloped and/or unproved reserves into proved producing reserves by applying water, gas and/or chemical flooding and other EOR techniques. Our assets are located onshore U.S. in Texas, New Mexico and Oklahoma.

In September 2009, we entered into a merger agreement with Resaca (the "Merger Agreement") pursuant to which Cano will be acquired by Resaca through the merger of a wholly-owned subsidiary of Resaca with and into Cano. The Merger is subject to customary conditions, including the approval of the common and preferred stockholders of Cano and the common shareholders of Resaca. The companies will hold separate meetings of their shareholders to approve the Merger. Assuming shareholder approval is received, the Merger is expected to be completed within a few days following the shareholder meetings. For more information regarding the proposed Merger, please refer to the Note 2 of the accompanying Consolidated Financial Statements and the joint proxy statement/prospectus of Resaca and Cano that is included in the registration statement on Form S-4 (File No. 333-162652) filed by Resaca with the SEC, and other relevant materials that may be filed by Cano or Resaca with the SEC. The following discussion relates to our plans without regard to the potential impact of the proposed Merger.

We are focused on enhancing the infrastructure and waterflood operations in our two largest properties, Cato and Panhandle. These development activities are more clearly described below under "Development Capital Expenditures and Operating Activities Update." We believe our portfolio of crude oil and natural gas properties provides opportunities to apply our operational strategy.

Our June 30, 2009 proved reserves of 49.1 MMBOE, were comprised 7.7 MMBOE of PDP, 2.4 MMBOE of PDNP, and 39.0 MMBOE of PUD. Crude oil reserves accounted for 79% of our total reserves at June 30, 2009.

Development Capital Expenditures and Operating Activities Update

For the year ending June 30, 2010 (the "2010 Fiscal Year"), our Board of Directors approved a development capital expenditures budget of $13.9 million (which excludes capitalized general and administrative and interest expenses). Our development capital budget is designed to minimize drawing on our available borrowing capacity under the ARCA until the proposed Merger with Resaca is completed. The budget is as follows:

† $5.4 million at the Cato Properties;

† $7.8 million at the Panhandle Properties; and

† $0.7 million at the remaining Properties.

Of the $13.9 million budgeted development capital expenditures, we have incurred $5.1 million through September 30, 2009. Our 2010 Fiscal Year development capital program does not include the drilling of new wells. The financing of our development capital expenditures is discussed below under "Liquidity and Capital Resources." The following reviews our capital development activity during the three-month period ended September 30, 2009 and planned activity during the balance of the 2010 Fiscal Year.

Cato Properties. As a result of increasing production response and corresponding high fluid levels from the waterflood project at the Cato Properties, we have added ten submersible pumps and plan to install additional submersible pumps as fluid levels warrant. Our 2010 Fiscal Year development capital plan includes the addition of two or three new injection wells and to enlarge the waterflood footprint from 640 acres to approximately 1,000 acres. We recently identified a new source of water located in a non-productive formation, that we believe will be able to produce 2,000 to 4,000 barrels of water per day per well. This will allow us to increase our daily water injection rate and expand the waterflood footprint. This formation has been penetrated in a number of existing wellbores in the Cato Properties. As we develop this new water source, we will be able to increase the waterflood footprint without decreasing the injection rate at our existing injectors, which should enable us to maintain production from existing producing wells. Our goal is to add 4,000 to 6,000 barrels of water injection per day to our waterflood footprint to achieve total injection of 21,000 barrels of water per day. Net production at the Cato Properties for September 2009 was 302 barrels of equivalent oil per day ("BOEPD"). Future net production from the Cato Properties is expected to be consistent with the September 2009 production rate until the total injection of 21,000 barrels of water per day is achieved, which is anticipated in the first calendar quarter of 2010.

Panhandle Properties We have retained an independent engineering firm to assist us with reservoir analysis and simulation modeling at the Cockrell Ranch unit. Based on this engineering firm's recommendations, we established a controlled water injection pattern to gauge the effects of optimizing water injection into the highest remaining crude oil saturation intervals of the Brown Dolomite formation. We are essentially performing a "Mini-Flood" in the key target interval at the Cockrell Ranch unit. The result of this field observation, coupled with rigorous reservoir simulation modeling, is expected to demonstrate an optimal pattern for waterflooding the project with an increasingly predicable production profile. Moreover, the field observation and modeling results will improve the planning of future development programs for the remaining leases located within the Panhandle Properties. The controlled injection project caused temporarily shut-in production during most of the quarter ended September 30, 2009. All production that was shut-in for the controlled injection project was restored on September 28, 2009. The results of the controlled injection project and the accompanying reservoir simulation testing should be completed in the first calendar year of 2010 quarter.

Net production at the Panhandle Properties for September 2009 was 588 BOEPD. The controlled injection project caused temporarily shut-in production during most of the quarter ended September 30, 2009 of approximately 25 BOEPD. All production that was shut-in for the controlled injection project was restored on September 28, 2009. Production was further reduced by 15 BOEPD as the primary purchaser, Eagle Rock Field Services, L.P. ("Eagle Rock"), of our natural gas and natural gas liquids ("NGL") experienced an unplanned plant outage from mid-August 2009 through the end of September 2009. The Eagle Rock gas plant was fully operational on October 1, 2009. During the quarter ended September 30, 2009, we constructed gathering lines to redirect natural gas production from Eagle Rock to DCP Midstream, LP ("DCP"). As of September 30, 2009, we had redirected approximately 45% of the natural gas production previously delivered to Eagle Rock, to DCP.

Desdemona Properties. During July 2009, we shut-in our Barnett Shale natural gas wells based upon the current and near-term outlook of natural gas prices and production from the Barnett Shale wells on a per-well basis. We have begun a project to return to production previously shut-in gas wells from the Duke Sand formation. The proved reserves associated these gas wells are currently classified as proved developed non-producing reserves. We plan to return 25 of these wells to production by December 2009. Production from these gas wells, including

associated natural gas liquids recovery from our gas plant, is expected to be approximately 10 MCFPD per gas well. Net production at the Desdemona Properties for September 2009 was 30 BOEPD.

Nowata Properties. We completed injecting our polymer flush during June 2009. Preliminary results have shown a two to three fold increase in the produced oil (as a percentage of total fluids produced) in our pilot observation wells. While we have seen favorable increases in production results from the pilot observation wells, we intend to perform several tests on the fluid properties produced from the pilot observation wells to gauge the effectiveness of the alkaline-surfactant-polymer ("ASP") chemical formula. We anticipate completing the ASP Pilot performance analysis within the next three months. There are currently no proved reserves associated with the ASP Pilot. Net production at the Nowata Properties for September 2009 was 216 BOEPD.

Davenport Properties. Net production for September 2009 was 71 BOEPD.

Liquidity and Capital Resources

Pending Merger with Resaca

On September 29, 2009, the boards of directors of Cano and Resaca Exploitation, Inc. approved an Agreement and Plan of Merger (the "Merger Agreement") by and among Cano, Resaca and Resaca Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Resaca ("Merger Sub"), pursuant to which Merger Sub will be merged with and into Cano (the "Merger") and Cano will become a wholly-owned subsidiary of Resaca.

Under the terms of the proposed Merger, each share of Cano common stock will be converted into the right to receive 2.10 shares of common stock of Resaca (or 0.42 shares of Resaca common stock if the proposed 1 to 5 reverse stock split is approved by the Resaca shareholders prior to the Merger) and each share of Cano Series D Convertible Preferred Stock (the "Preferred Stock") will be converted into the right to receive one share of Resaca Series A Convertible Preferred Stock. The Merger is intended to be a tax-free transaction to the Resaca shareholders and to the Cano stockholders to the extent the Cano common stockholders receive Resaca common stock and the Cano preferred stockholders receive Resaca preferred stock in the Merger.

Consummation of the transactions contemplated by the Merger Agreement is conditioned upon, among other things, (1) approval of the holders of the common stock and preferred stock of Cano, (2) approval of the holders of the common stock of Resaca, (3) the listing of Resaca common stock on the NYSE Amex,
(4) the refinancing of existing bank debt of Resaca and Cano, (5) the receipt of required regulatory approvals, (6) Resaca's application for readmission to the Alternative Investment Market of the London Stock Exchange and (7) the effectiveness of a registration statement relating to the shares of Resaca common stock to be issued in the Merger. The Merger Agreement contains certain termination rights for each of Cano and Resaca, including the right to terminate the Merger Agreement to enter into a Superior Proposal (as such term is defined in the Merger Agreement). In the event of a termination of the Merger Agreement under certain specified circumstances described in the Merger Agreement, one party will be required to pay the other party a termination fee of $3,500,000.

We entered into stock voting agreements with 75% of the holders of Cano's Preferred Stock on various dates between September and November 2009. Each stock voting agreement contains the same terms and provides, among other things, that each of the preferred holders will vote all its shares of our stock (a) in favor of an amendment to the Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of Cano (the "Series D Amendment"), (b) in favor of adoption of the Merger Agreement, and (c) in accordance with the recommendation of our Board of Directors in connection with any Target Acquisition Proposal (as such term is defined in the Merger Agreement). The Series D Amendment generally provides that the holders of Preferred Stock shall have no rights arising from the proposed Merger with Resaca (including any right to require us to redeem their shares of Preferred Stock) other than the right to receive the merger consideration specified in the Merger Agreement. To be effective, the Series D Amendment must be approved by the holders of a majority of the shares of Preferred Stock, voting as a separate class, and by the holders of a majority of the shares of our common stock, voting as a separate class, and then filed by us with the Secretary of State of Delaware.

On October 20, 2009, we entered into a Stock Voting Agreement with S. Jeffrey Johnson, our Chief Executive Officer and Chairman of our board of directors, which provides, among other things, that Mr. Johnson will vote all of his shares of our stock in favor of the Series D Amendment. Mr. Johnson owns approximately 3.7% of the Preferred Stock. During the quarter ended September 30, 2009, we paid Mr. Johnson a cash preferred dividend payment of approximately $20,000.

Forward-looking statements in this Quarterly Report on Form 10-Q reflect Cano's current plans as a stand-alone entity and do not take into account the impact of the proposed Merger with Resaca, except where such statements specifically relate to the proposed Merger.

Resaca is an independent oil and gas exploitation company headquartered in Houston, Texas, with operations focused on properties in the United States, specifically in the Permian Basin of West Texas and southeast New Mexico.

Liquidity

At September 30, 2009, we had cash and cash equivalents of $0.8 million and negative working capital of $1.9 million. For the three-month period ended September 30, 2009, we generated cash flow from operations of $0.5 million.

We depend on our credit agreements, as described in Note 4 to our Consolidated Financial Statements, to fund a portion of our operating and capital needs. Under the ARCA, the initial and current borrowing base, based upon our proved reserves, is $60.0 million. At September 30, 2009, our remaining available borrowing capacity under the ARCA was $13.8 million, and at November 13, 2009, our remaining available borrowing capacity was $10.0 million. Pursuant to the terms of the ARCA, our borrowing base is to be redetermined based upon our June 30, 2009 reserve report. We have submitted our reserve report and other financial information to our lenders. We have not received formal notification of any changes to our borrowing base.

At September 30, 2009, we were in compliance with the debt covenants contained in each of our credit agreements. The compliance determination for the twelve-month period ending December 31, 2009 will be the first financial covenant tests which exclude the gain from our sale of the Pantwist Properties (see Note 6 to our Consolidated Financial Statements). Based upon our nine month operating results through September 30, 2009, it appears likely that we may fall out of compliance with one or more of our financial covenants under our credit agreements as of December 31, 2009. If a combination of increased production, rising commodity prices, changes in our capital structure, the closing of our pending Merger and other actions do not occur by December 31, 2009, we anticipate not being in compliance with the covenants. In that event, we will seek covenant relief from our lenders, though there can be no assurance that we will be successful in obtaining such relief.

Our credit agreements, discussed in Note 4 to our Consolidated Financial Statements, include change of control provisions which require us to refinance the credit agreements at the close of the Merger. We are working with Resaca regarding the credit arrangements for the combined company.

On December 28, 2007, our universal shelf registration statement was declared effective by the SEC for the issuance of common stock, preferred stock, warrants, senior debt and subordinated debt up to an aggregate amount of $150.0 million. After the issuance of common stock on July 1, 2008, we have $96.0 million of availability under this registration; however, the amount of securities which we may offer pursuant to this shelf registration statement during any twelve-month period shall be limited to one-third of the aggregate market value of the common equity of the Company held by our non-affiliates since our public float is not in excess of $75.0 million. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. At the time any of the securities covered by the registration statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering.

Historically, our primary sources of capital and liquidity have been issuance of equity securities, borrowings under our credit agreements, and cash flows from operating activities. Our two credit agreements are discussed in greater detail as presented below. For the 2010 Fiscal Year, we expect to fund our operations and capital

expenditures from cash from operations, borrowings under our credit agreements and the capital markets. To develop our reserves as reported in our June 30, 2009 reserve report, we will require access to the capital markets in each of the next four years, as our projected capital expenditures are greater than projected cash flow from operations through December 2012.

Credit Agreement Covenant Compliance

At September 30, 2009, the ARCA and subordinated credit agreements contain three principal financial covenants with reconciliations of each to corresponding GAAP amounts (if necessary):

† For both credit agreements, a current ratio covenant requires us to maintain a ratio of not less than 1.00 to 1.00 for each fiscal quarter. The current ratio is calculated by dividing current assets (as defined in both credit agreements) by current liabilities (as defined in both credit agreements). Current assets include unused borrowing base under the ARCA and the aggregate availability under the subordinated credit agreement. Current liabilities exclude all current portions of long-term debt other than any current debt relating to the Series D Convertible Preferred Stock and liabilities for asset retirement obligations. Current assets and current liabilities exclude derivative assets and liabilities. At September 30, 2009, our ratio of current assets to current liabilities was 1.73 to 1.00, calculated as follows (in thousands):

                                               September 30, 2009
Current assets (GAAP)                         $              9,014
Unused borrowing base at September 30, 2009                 13,800 (1)
Less: derivative assets                                     (4,385 )
Modified current assets (non-GAAP)            $             18,429 (A)

Current liabilities (GAAP)                    $             10,914
Less: derivative liabilities                                  (199 )
Less: asset retirement obligation                              (88 )
Modified current liabilities (non-GAAP)       $             10,627 (B)

Modified current ratio (A) / (B)                      1.73 to 1.00

† We are required to maintain a ratio of consolidated Debt (as defined in both credit agreements) to consolidated EBITDA (as defined in both credit agreements) covenant. Under the ARCA, we are required to maintain a ratio for the four fiscal quarter period then ended of not greater than 4.00 to 1.00. Under the subordinated credit agreement, the ratio is 4.50 to 1.00. For the purposes of these ratios, Debt does not include amounts relating to our Series D Convertible Preferred Stock. At September 30, 2009, our ratio of consolidated Debt to EBITDA was 3.32 to 1.00, calculated as follows (in thousands):

                         September 30, 2009
Long-term debt (GAAP)   $             61,200 (C)




                                            Four Fiscal Quarter
                                               Period Ended
                                            September 30, 2009
Net loss (GAAP)                            $             (16,547 )(2)
Depletion, depreciation and amortization                   5,771
Interest expense, net                                        546
Income tax benefit                                        (8,028 )(2)
Other adjustments (non-GAAP)                              36,708 (3)
EBITDA (non-GAAP)                          $              18,450 (D)

Debt to EBITDA (C) / (D)                            3.32 to 1.00

(3) As defined in both credit agreements, other items are considered in the calculation of EBITDA, including impairment of long-lived assets and goodwill, stock-based compensation, accretion of discount on asset retirement obligations, exploration expense, settlements of fire litigation lawsuits and non-cash items included in the computation of income from discontinued operations.

† We are required to maintain a ratio of consolidated EBITDA (as defined in both agreements) to consolidated Interest Expense (as defined in both agreements) covenant for the four fiscal quarter period then ended. Under the ARCA, we are required to maintain a ratio of not less than 3.00 to 1.00. Under the subordinated credit agreement, our ratio is 2.50 to 1.00. At September 30, 2009, our ratio of consolidated EBITDA to consolidated Interest Expense ratio was 7.25 to 1.00, calculated as follows (in thousands):

                                                Four Fiscal Quarter
                                                   Period Ended
                                                September 30, 2009
EBITDA (non-GAAP) (see reconciliation above)   $              18,450 (E)

Interest expense                               $                 546
Capitalized interest                                           1,425
Cash payment of preferred stock dividends                        933
Less: amortization of debt issuance costs                       (358 )
Interest expense (non-GAAP)                    $               2,546 (F)

EBITDA to interest expense (E) / (F)                    7.25 to 1.00

Both of our credit agreements also contain customary events of default that would permit our lenders to accelerate the debt under both credit agreements if not cured within applicable grace periods, including, among others, failure to make payments of principal or interest when due, materially incorrect representations and warranties, breach of covenants, failure to make mandatory prepayments in the event of borrowing base deficiencies, events of bankruptcy, dissolution, the occurrence of one or more unstayed judgments in excess of $1,000,000 and defaults upon other obligations, including obligations under the subordinated credit agreement. At September 30, 2009, we were in compliance with all of our covenants and had not committed any acts of default under both the ARCA and the subordinated credit agreements.

Based on our current estimates of income and expenses, it appears likely that we may fall out of compliance with one or more of our financial covenants under the ARCA and/or the Subordinated Credit Agreement as of December 31, 2009. We are currently in discussions with our lenders regarding this possibility and potential solutions, including without limitation, obtaining waivers from the applicable covenants, entering into amendments to our credit agreements or raising additional capital through equity issuances. If we are unable to obtain such waivers, to negotiate such amendments or to obtain necessary funding from operations or outside capital raising activities, we could default on our obligations under one or both of our credit agreements, which default, if not cured or waived, could result in the acceleration of all indebtedness outstanding under our credit agreements.

Results of Operations

For the quarter ended September 30, 2009 ("current quarter"), we had a loss applicable to common stock of $4.0 million, which was a $15.8 million decrease as compared to the $11.8 million income applicable to common stock incurred for the quarter ended September 30, 2008 ("prior year quarter"). Items contributing to the $15.8 million earnings decrease were lower gain on derivatives of $24.2 million and lower operating revenues of $5.7 million. Partially offsetting the earnings decrease were lower operating expenses of $2.5 million, reduced loss on discontinued operations of $0.9 million and lower preferred stock dividends of $0.5 million.

These items will be addressed in the following discussion.

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