These engine are known for blowing head gaskets. If it were in my shop I would order a head gasket kit #794152 and replace the head gasket. First remove the valve cover and plug. Turn the engine over by hand and look to see if the valves are operating correctly. If they are remove the head, clean and replace the head gasket. Reinstall, torquing properly, and adjust the valves. Here is a service manual for the engine.
https://docs.google.com/open?id=0B6NaqjIxWV1ybEN0LWo3azl6OUU. How you proceed is this is just my opinion.