My truck has milky oil!

[davepl]

A compression test probably won't tell you much, you really need to do a leakdown test I think.

If you have a leak between coolant and combustion, combustion will always win (except when the engine's not running) as the combustion pressures are orders of magnitude higher than the cooling system pressure.

But yes, get the water out of the crankcase for sure. If nothing else, water is heavier than oil and if you've got enough water in there, once it sits the oil pump pickup will be in the water section at the bottom of the pan, and when you start it you'll be "lubricating" with water (ie: not lubricating).