I am guessing you have 6- 71's. Are they a V engine or straight?
The water in the oil might be from sitting a long time. When was it last changed?
If you are going to convert a truck engine get all your coolers etc pressure tested and cleaned to make sure you don't fill your new one with the old ones junk.
Here is an example of a rebuilt straight 6- 71 http://www.dieselenginemotor.com/die...nes/974,1.html