I suggest a leak down test instead of a compression test. Compression tests (when you have that much water in the oil) can be misleading in my experience.
I also suggest flushing the engine to get rid of the water before too much time goes by! You may have to do this flush a few times before oil/flush mixture runs clear of water.
I would check the intake to head mating surfaces, exhaust gasket and then the head gasket.
