* Hit by impairments of $1.27 bln
* Drops dividend to handle difficult market outlook
* Core Q4 earnings in line
* Shares down 2.6 pct (Adds detail, analyst comment, share price)
OSLO, March 4 (Reuters) - Oil services company Subsea 7 swung to a surprise fourth-quarter operating loss and has suspended dividend payments because of an expected decline in sales and earnings margins in difficult market conditions this year.
The Oslo-listed business, which focuses on the North Sea, Brazil and West Africa, on Wednesday posted a $1.1 billion fourth-quarter operating loss, hit by impairments.
That compared with expectations for a $194 million profit in a Reuters poll of analysts and the $112 million earned in the same period a year earlier.
The company took a non-cash goodwill charge of $1.18 billion after a downward revision of forecast activity levels as demand from the oil industry continues to fall in the face of weak crude prices. It also took an $89 million impairment charge mainly associated with a vessel and some equipment.
"Reflecting challenges facing the oil and gas industry in the near to medium term, and to preserve the Group's financial flexibility so that it can benefit from opportunities that may arise during the downturn, the board of directors will not recommend a dividend," a company statement said.
It added that 2015 revenue will be "significantly" lower than the record $6.9 billion reached last year but did not say how much it will fall. Analysts in the Reuters poll on average forecast sales of $5.84 billion.
By 1026 GMT Subsea 7's shares were down 2.6 percent, against an average rise of 0.2 percent for the wider European energy sector.
"The shares are getting expensive ... I believe the shares should fall before they start rising again. This is a long downturn in the oil industry," Arctic Securities analyst Tord Augestad said, adding that the company's order intake is weak.
Subsea 7's backlog dropped to $8.2 billion at the end of 2014, below a poll forecast of $8.3 billion and down from $11.8 billion a year ago.
Excluding the impairments, fourth-quarter core operating earnings before interest, tax, depreciation and amortisation (EBITDA) came in at $297 million, in line with analysts' forecasts and up from $242 million a year earlier. (Reporting by Stine Jacobsen and Ole Petter Skonnord; Editing by David Goodman)