I agree with you on the timing cover water pump setup .It was one of the first things that came to mind when he originally said the oil was contaminated with water ,but when he said that the cylinders them selves had water on top of the pistons (so much so that it blew out the plug holes when he turned it over) it made me lean towards a leak from the intake.These small block Mopars have a real design flaw with the water passing through the timing cover IMO.I was real anal when i put the front of mine back together after the cam swap ,for that very reason.If it leaks the water goes right into the pan and you cant even see it leaking from the outside .One little pit on any surface near the port ,a gaskets misaligned ,and your done ...