MikeE,
If/when you drop the oil pan and remove all the gunk/crud in the pan, thoroughly clean the by-pass oil filter canister and put in a new filter element.
Then, use single grade (30 wt) or multigrade (10-30 to 15-40) detergent/modern engine oil. Detergent oil holds most of the small crud-producing (particles/junk) in suspension - the filter then "catches" that gunk.
It may be that this change in type of oil should not be done with a well-worn engine (or, with a babbetted rod engine)?
If you have moisture in your oil (pan), it is most likely coming from the atmosphere via the "breathing holes" in the valve cover. The road draft tube should draw these "vapors" away before they drop-out as liquid. This process/hope does not work if you drive short distances (no warm-up) at low speeds (the road draft tube does not work below 15 mphs). If/when I go for a short low-speed drive, I try to change the route to be sure I get warm-up and road-draft "suction" (10-15 miles above 40 mph, maybe).
If I am wrong on any of the above advice, we will quickly see corrections.
