Just a couple thoughts......
I would not worry about a little smoke out of a tractor that old. I'm confident the EPA regs were not as strict back when that tractor was new. I might keep an eye on the oil level for a little while, just to satisfy my curiousity..... but I don't think there is a problem there.
You are correct that the mower is a little big for that tractor, but if it were me, I'd probably keep the five footer. I used to have an 18 HP Yanmar (also approx 15ish @ the PTO) with a five foot Woods belly mower under it and it did really well. Yes..... when I let the grass go too long it would labor a little in the thick stuff, but 90% of the time it mowed full width no problem. I would add some suitcase weights to the front end though..... I think this will make the tractor handle better all around.
Agree. Can you change your mowing pattern to eliminate having to go up the hill and go across or down? Most definitely add some weight to the front.