* Q2 profit falls 72 pct, misses estimates by $1.1 bln
* Shares fall, worst performance in two months
* Q2 cashflow did not cover dividend payments
* Shell reliant on asset sales to make money
* Delays investment decision on Lake Charles LNG project (Adds details, updates shares)
By Karolin Schaps and Dmitry Zhdannikov
LONDON, July 28 (Reuters) - Royal Dutch Shell missed quarterly profit expectations by more than $1 billion onThursday after reporting a 72 percent plunge in earnings due toweak oil prices and high costs following its $54 billiontakeover of BG Group.
Shell's second-quarter current cost of supplies - itsdefinition of net income - was $1 billion, much lower than the$2.1 billion expected by analysts. They had expected a betterperformance at the upstream division, which lost $1.3 billion,compared with a $469 million deficit last year.
"Lower oil prices continue to be a significant challengeacross the business, particularly in the upstream (sector),"said Chief Executive Ben van Beurden, who said last month hewanted Shell to be the best oil company for investor returns.
Oil averaged $39.59 a barrel in the second quarter, downfrom $55.84 a year earlier. Shell said it loses or gains around$5 billion with every $10 move in Brent crude prices.
Shell also spent more than expected on corporate expenses,with some $250 million going on redundancy and restructuringcharges following the BG deal.
The oil major is laying off some 12,500 workers over2015-16.
Shell's London-listed "A" shares had their worst day in twomonths and were down 3.4 percent by 1304 GMT, compared with a0.6 percent fall in the oil and gas companies index.
Shell rivals BP and Statoil also reportedworse-than-expected second-quarter results this week mainlybecause analysts' expectations on cost reductions had been toooptimistic.
Despite its poor performance, Shell left unchanged its maincapital investment and disposal targets as well as its prizeddividend.
Cash flow from operating activities for the second quarterof 2016 was $2.3 billion compared with $6.1 billion for the samequarter last year, meaning it was not enough to cover thequarterly dividend of $3.7 billion.
"We do expect the release to have negative implications forthe stock short-term, but ultimately a rebalancing of the cashequation is happening and despite the seasonality in earningsShell is, in our view, heading in the right direction," analystsat Barclays wrote.
RELYING ON ASSET SALES
Shell's debt-to-equity ratio, or gearing, rose to 28.1percent versus 12.7 percent a year earlier, meaning its debtpile is mounting rapidly. Shell's self-imposed gearing ceilingis 30 percent.
Chief Financial Officer Simon Henry said at current oilprices of $43-43.50 a barrel, the company would not make enoughmoney unless it raised cash from asset disposals.
"In the next six to 12 months the biggest driver of thegearing level will be the divestments and the oil price," hetold journalists.
Shell is undergoing a $30 billion asset divestment programmeand expects to sell $6-8 billion this year. It has completed oris near completion on $3 billion so far and in discussions tosell 17 more assets, Henry said.
The oil major is also on track to meet its drasticallyreduced annual capital investment programme of $29 billion.
On Thursday, Shell said it would delay a final investmentdecision for its Lake Charles liquefied natural gas (LNG)project in the United States. It was previously planned for thisyear.
This follows Shell's decision in February to push back aninvestment decision on its Canadian LNG project.
Shell's BG takeover has added huge costs in the short termbut the second-quarter performance shows its impact on Shell'sportfolio.
Oil and gas production rose 28 percent year-on-year and BG'sLNG business, which turned Shell into the world's largest LNGtrader, boosted LNG sales volumes by 52 percent to 14.25 milliontonnes in the second quarter.
Shell's production in Nigeria will fall by around 35,000barrels per day in the second half of the year due to "sabotageincidents" and scheduled repairs, it said. It warned earningscould be impacted if the situation deteriorated. (Editing by Dale Hudson and Adrian Croft)
