By Karolin Schaps and Dmitry Zhdannikov

LONDON (Reuters) - Royal Dutch Shell <RDSa.L> missed quarterly profit expectations by more than $1 billion on Thursday after reporting a 72 percent plunge in earnings due to weak oil prices and high costs following its $54 billion takeover of BG Group.

Shell's second-quarter current cost of supplies - its definition of net income - was $1 billion, much lower than the $2.1 billion expected by analysts. They had expected a better performance 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 challenge across the business, particularly in the upstream (sector)," said Chief Executive Ben van Beurden, who said last month he wanted Shell to be the best oil company for investor returns.

Oil averaged $39.59 a barrel in the second quarter, down from $55.84 a year earlier. Shell said it loses or gains around $5 billion with every $10 move in Brent crude prices <LCOc1>.

Shell also spent more than expected on corporate expenses, with some $250 million going on redundancy and restructuring charges following the BG deal.

The oil major is laying off some 12,500 workers over 2015-16.

Shell's London-listed "A" shares had their worst day in two months and were down 3.4 percent by 1304 GMT, compared with a 0.6 percent fall in the oil and gas companies index <.SXEP>.

Shell rivals BP <BP.L> and Statoil <STL.OL> also reported worse-than-expected second-quarter results this week mainly because analysts' expectations on cost reductions had been too optimistic.

Despite its poor performance, Shell left unchanged its main capital investment and disposal targets as well as its prized dividend.

Cash flow from operating activities for the second quarter of 2016 was $2.3 billion compared with $6.1 billion for the same quarter last year, meaning it was not enough to cover the quarterly dividend of $3.7 billion.

"We do expect the release to have negative implications for the stock short-term, but ultimately a rebalancing of the cash equation is happening and despite the seasonality in earnings Shell is, in our view, heading in the right direction," analysts at Barclays wrote.

RELYING ON ASSET SALES

Shell's debt-to-equity ratio, or gearing, rose to 28.1 percent versus 12.7 percent a year earlier, meaning its debt pile is mounting rapidly. Shell's self-imposed gearing ceiling is 30 percent.

Chief Financial Officer Simon Henry said at current oil prices of $43-43.50 a barrel, the company would not make enough money unless it raised cash from asset disposals.

"In the next six to 12 months the biggest driver of the gearing level will be the divestments and the oil price," he told journalists.

Shell is undergoing a $30 billion asset divestment program and expects to sell $6-8 billion this year. It has completed or is near completion on $3 billion so far and in discussions to sell 17 more assets, Henry said.

The oil major is also on track to meet its drastically reduced annual capital investment program of $29 billion.

On Thursday, Shell said it would delay a final investment decision for its Lake Charles liquefied natural gas (LNG) project in the United States. It was previously planned for this year.

This follows Shell's decision in February to push back an investment decision on its Canadian LNG project.

Shell's BG takeover has added huge costs in the short term but the second-quarter performance shows its impact on Shell's portfolio.

Oil and gas production rose 28 percent year-on-year and BG's LNG business, which turned Shell into the world's largest LNG trader, boosted LNG sales volumes by 52 percent to 14.25 million tonnes in the second quarter.

Shell's production in Nigeria will fall by around 35,000 barrels per day in the second half of the year due to "sabotage incidents" and scheduled repairs, it said. It warned earnings could be impacted if the situation deteriorated.

(Editing by Dale Hudson and Adrian Croft)