88 Mercruiser 4.3 V6 Water in oil and exhaust manifold

2000 Larson 18' Bowrider
1988 Mercrusier GM 4.3L V6 (Rebuilt Block up 4 years - 2 seasons ago) sat for 2 years
Raw water cooling

Just bought a boat with a bad motor so I could swap my good motor from my old boat into it. Old boat was crushed by a tree during Hurricane Sandy.

Swapped motor into it last weekend. Replaced exhaust flaps before I put it in, they were shot. Outdrive on 2000 boat is good.

Tested with ears on land and motor ran good and oil looked clear.

Took it out the other day and the second time out I noticed oil was suddenly milky and seemed higher. Did oil change and took it out again on Sunday. Cruised around for awhile and drove fine. No sudden stops. Stopped and floated for about an hour. Went to re-start and its hydro-locked. Pulled exhaust riser off and there is an inch of water in the manifold and pulled plus and one cylinder is full of water.

Checked flap on that side and it looks good, still springy and doesn't look to be binding.

Ideas on what is causing water in exhaust and how its getting in oil? Connected or coincidence?

Connected. Manifold or riser is possibly no good. Other possibility is a crack in the cylinder wall or cylinder head. Water will pass the rings into the crank case.

Update

I just did a compression test. Odd results. Here it goes:

Cylinder# Pressure
1 140
2 130
3 140
4 185 (A little water in there still i think)
5 135
6 125

Update - Second compression test after WD-40 and a few squirts of oil as was suggest by someone

Possibly more confused about results:

Cylinder# Pressure
1 165
2 180
3 180
4 270
5 160
6 180