* Baytex's shares down 12 pct, Raging River down 10 pct
* Baytex's offer represents premium of 10 pct for Raging River
* Premium seen lower than investors' expectations (Adds background on Canada shale, oil sands; Updates share price)
By John Benny
June 18 (Reuters) - Baytex Energy Corp BTE.TO will buy rival Raging River Exploration Inc RRX.TO for C$2.8 billion ($2.13 billion), the Canadian oil and gas producer said on Monday, becoming the latest company to bet big on Canada's vast shale reserves.
Oil producers have made a beeline for the Duvernay and Montney formations, known for their light oil which is easier to refine and cheaper to produce than northern Alberta's oil sands crude.
Seven Generations VII.TO and Encana Corp ECA.TO are already among the leading Canadian producers operating in the two regions, while Chevron Corp (NYSE:CVX) CVX.N announced its first Canadian shale development in the Duvernay in November.
The oil sands boom dates back two decades, when improved technology, rising crude prices and fears of global oil shortages sparked a rush to develop the world's third-largest reserves.
However, in the last five years, much of that investment has migrated south as U.S. shale firms pioneered new drilling techniques and flooded global oil markets with cheaper-to-produce crude. this year, the Canadian heavy oil discount widened significantly against the West Texas Intermediate (WTI) as growing oil stockpiles couldn't be moved out of the resource-rich province of Alberta due to transport bottlenecks.
After the announcement of Monday's deal, shares of both companies fell and analysts pointed to investor skepticism about the all-stock deal and a low premium for Raging River shareholders.
The Baytex deal, the second all-stock acquisition in the Canadian oil industry this year after Vermilion Energy's VET.TO buyout of Spartan Energy, sends investors the message that capital is not available for large-scale cash transactions, said Lyndon Dunkley, an analyst at Beacon Securities.
Baytex's offer — 1.36 Baytex shares for each Raging River share — represents a 10 percent premium to Raging River's Friday closing price, according to Reuters calculations.
The premium was much lower than investors' expectations, Dunkley said. "It's just not what we believe the market was expecting as an outcome for the strategic repositioning process (Raging River) announced in March," Dunkley added.
Raging River has since March explored strategic options for its business, including selling certain assets.
The combination of Baytex and Raging River will be led by Baytex Chief Executive Officer Edward LaFehr once the deal closes in August, Baytex said.
The companies expect to produce a combined 100,000 to 105,000 barrels of oil equivalent per day in 2019 and expect capital expenditure of between C$750 million and C$850 million. = C$1.3162)