how many hours are on this machine?

couple things you need to verify first

where is the water actually coming from
- check the radiator/cooling system and see if the level is low in the radiator or if it is comtaminated also (not the resivoir, check inside the radiator itself).
- check the air intake system, all hoses etc and see if there is any contamination there, look where the metal junction is in the intake hose where the vaccum line from the vaporizer connects to. Also remove the pcv valve in the valve cover connects and see if any contamination is there.
- take a compression test on all cylinders

sometimes if these engines sit for long periods and are not run for very long at a time they will accumulate condensation inside the engine and that can be mistaken for a blown head gasket, there will be milky looking oil from that.

Of course after a compression test that will determine if there are any issues with the head gasket usually.
If nothing revealed there then run a pressure test on the cooling system.
In either case a compression test or cooling system pressure test would most likely reveal any problems.

If it winds up just being condensation then cleaning out the contaminated parts and changing the engine oil and filter will get rid of the milky oil.
But i would do the oil/filter change anyway as it does not need that contaminated oil in the engine ;o)