Re: some support on head gasket
cracked head will effect performance for sure. In order for an engine to run at peak it needs 3 things.
fuel
spark
compression
If one of those 3 starts to weaken then the performance will as well. anything that allows air to escape a cylinder chamber will hurt your performance, and a crack in the block will do just that.
Normally I would say it might not be the head gasket or a crack, but since you had performance issues which led you to find the water in the oil, I am betting you will find either cracked head/block, broken head gasket, piston ring is shot, cracked piston surface, warped cylinder walls. But no matter which one of those you find, it will be found by removing the head.
One way you can test is to start the engine, pull and reinstall each spark plug wire 1 at a time, and see which ones does not affect the engine idle much. In my case when I decided to pull the head, both cylinders 2 and 3 did not affect idle much so I knew something with those cylinders was bad. in my case turned out to be a broken head gasket between cylinders 2-3.
Keep us posted on what you find. Pictures are good.
Good Luck.