Oliver 1800 engine problem - oil water mix

[29toter]

I bought an Oliver 1800 a little while ago the fluids were freshly changed. I drove it home (about five miles) all was fine. Used it for brush hogging about two hours and all was fine. Started using the hydraulics to pull fence posts (about 40 minutes) and I noticed a white milky substance dripping out of the governor. I shut her down immediately and checked the oil, (slightly milky). After this I was unable to get back and look into it for a while (ten days). When I did, I checked the oil again and it seemed less milky and darker than it had been before. Not black but definitely not new oil color. At this point I checked compression. Now I know the procedure is to warm up the engine but I was afraid of running the engine with contaminated oil so the test was done on a cold engine. All plugs were in except for the cylinder being tested. This is what I found.
Cyl #1- 175 lbs
Cyl #2- 175 lbs
Cyl #3- 170 lbs
Cyl #4- 170 lbs
Cyl #5- 170 lbs
Cyl #6- 165 lbs

All cylinders reached this pressure in three or four turns and held pressure for 2 minutes after. The engine never skipped, never missed and didn't bog down. Also there was no smoke from the exhaust.

Can anyone give me a clue as to what could be wrong? Or where to start looking and/or any test procedures to help me narrow this problem down?
Thanks everyone

 

[Bison]

Coolant will settle overnight to the bottom of the pan, looses the oil drain plug and drain off the water if there is any, that will give you an indication how severe the leak is.
Do a coolant pressure test first with a cold engine and then with engine hot.
If you have no radiator boil over when hot but loose pressure when cold and/or hot and coolant enters the crankcase it is common with engines this old to be leaking past the cylinder sleeve 0 rings

 

[29toter]

Bison, Thank you, I'll look into that this weekend. If it is the cylinder sleeve O ring, does that mean a complete engine overhaul? And if it does, could the engine be "upgraded" to a 283 from the 265 she seems to be now?

 

[Bison]

Complete overhaul is hard to tell from here but as the engine pretty much has to come apart to be able replace the cylinder 0 ring seals you may as well while you're at it replace at least the rod and main bearings and crank seals and piston rings if the crank journals and liner and piston wear are within specs,..a valve job prob won't hurt either.
I think the 283 was the diesel version( that is what i have in my 1800)
I don't know if you can upgrade from the gas to the diesel without a complete engine swap

 

[29toter]

As I understand when the series A gas was a 265 the Diesel was a 283. Later in the B and C series when the gas was a 283 the Diesel was a 310. In any case I agree with you. If the engine needs to be pulled anyway, might as well make it new again.

Thank you
Bison