If it works, what's not to like? I've used Watco as a furniture finish and I like it. It's basically just a thinned oil/varnish blend. Considering that, it's pricey for a product that's mostly thinner, but it's good quality and it's convenient. Rather than doing a two-step finish and putting a soft oil over the Watco, try mixing the two and applying it in one step. It will save you time and should provide the same feel, but with better durability.

To answer the original question, I don't see any reason that re-coating your paddle with an oil/varnish blend wouldn't work. As Bill mentioned, scuffing the surface first is a good idea. I tend to prefer to sand with 320 or 400 grit rather than use steel wool, but I'm usually re-coating used paddles that need to have surface burrs removed and sandpaper is better for that. For your purposes, either will work, as will Scotch Brite (get the maroon pad).