The withdrawal of the hard-working Delve means Wallaby backrower Scott Higginbotham will move from blindside flanker to No.8 with Luke Jones shifting from the second row to six.
Wallaby-in-waiting lock Cadeyrn Neville, who came off the bench in their opening two games, will start and Jordy Reid will come onto the bench for his first Super Rugby match.
"Nothing is structurally wrong with Gareth's shoulder. He's simply has not recovered in time for this week's match," said Hill.
The pressure will be on Beale, who has plenty to play for as the Rebels look to rebound from their loss to the Brumbies.
He stunned the Waratahs when he defected to the Rebels for the 2012 season, although they are believed to be chasing hard to get him back home with his Melbourne contract up at the end of this year.
Hill believed NSW should continue with code-hopper Israel Folau at fullback despite his disappointing debut in their loss to Queensland.
That wasn't because he felt the Rebels could exploit the newcomer but that he deserved another chance.
The Rebels had a taste of Folau's ability when he scored two tries in his first game for NSW in a trial in Hobart.
"Everyone is focusing on what Izzy didn't do well and they should be focusing on what he did do well," Hill said.
"The Waratahs made seven line breaks and he was a part of five of them.
"He's a very good player and I think you should give credit to the Reds for how they managed him.
"If he is playing, he's going to be danger."
Rebels: James O'Connor (capt), Lachlan Mitchell, Mitch Inman, Rory Sidey, Richard Kingi, Kurtley Beale, Nick Phipps, Scott Higginbotham, Scott Fuglistaller, Luke Jones, Cadeyrn Neville, Hugh Pyle, Laurie Weeks, Ged Robinson, Nic Henderson. Res: Shota Horie, Paul Alo-Emile, Jordy Reid, Jarrod Saffy, Nic Stirzaker, Angus Roberts, Tom English.
- AAP
