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Have you inspected the thermostat for clear passage and/or fully opening?
Is this oil; exhaust "oil" or gear oil??
It could be unburned fuel dumped into the exhaust, a closer look at the recirculation hoses/screen to see if clear is recommended
Get the propper parts! You have the C type (or D ??) lower unit & you likely (should) change the seal around the shift-shaft
I've attached the parts manual for reference
Yes the pressure relief holes but with the LU not installed the exhaust & return water would come straight out of the bottom and cannot be forced back up because of the missing LU
Jerry you're correct, the water pump housing is not the correct one for this LU
How it's possible to see water coming out of the relief holes (without the LU mounted) is beyond me
I hate to Hack a post but my curiosity got the better of me, there for my excuses.
I have seen a few flywheels with the tiny circular blade bend upwards, does this cause a problem with firing and/or time?