Compression test will tell you if it is an intake gasket in most cases. You could put a radiator tester on it and build pressure (no more than 14-16 lbs though) and see if you can see/hear any leaks. With water in the oil, the bearings may be torched anyway, so a rebuild might not be a bad idea in the long run. If you do, put a 5.7 in it. I don't know what all is involved, but it shouldn't be much, if anything. It will be the same price to rebuild (you will have a little for a good core, but you can probably sell the 305... even if only for scrap. The 5.7 is soooooooo much better of an engine. At any rate, I wonder if you have issues with cam/crank position sensor phasing (maybe the guy that had it started to take it apart and then just decided to sell it so he just stuffed things back together. The other thing I would look at is the cap and rotor. These trucks have issues with caps and rotors. Mine is very finnicky about the brand that I use and I chased issues with severe corrosion until I discovered that the vents in the underside of the distributor were plugged. I cleaned them out and all has been well since. One word of warning, the distributor body on these trucks is a composite material (think: plastic). The cap hold-down bolts are torx headed (T-15 or -20 as I recall). Be carefule when you put them back in to make sure they aren't cross-threaded and you don't over-tighten them. I always use the old screws since the new ones come with some kind of hard thread-locker on them that has a tendancy to put enough stress on the threads to bust the threads out of the housing. Ask me how I know... Good luck and let us know more as you work through it and we will try to help you out.