Milky Oil

Good compression normally does indicate the head gaskets survived.
The older boats did have collapseable exhaust hoses.   I have had two and been in one that had this happen. With the hose collapsed the engine has no power since the exhaust can't get out or al least is very restricted. You can't see this from the outside as it is an inner liner that collapses.   Newer boats no longer have this type hose.
It is possible to take water into the engine from the exhaust. I have seen this happen in boats where the flapper is gone from the stern exhaust outlet.   We also see it when an exhaust manifold fails and lets water enter a cylinder.   As mentioned if you pull your spark plugs and study them you may see exactly where the water is coming in.
A cracked head or block could let water in also but that is not very common with the 351W.
My first Nautique was a 1978, Im still partial to that boat. It was a great boat we put 1,500 hours on that boat in 8 years.

Is it possible you put the thermostat in backwards? I’m trying to figure out why it overheated after the thermostat installation. It’s easy enough to do I suppose. I don’t know if it would operate properly in reverse and it could be worse.

I will speculate but bear in mind the brains on this site are far more capable marine troubleshooters! I wonder if it’s possible for the exhaust hoses to collapse by design from the overheat condition and somehow water in the cooling system backs up somehow into the crankcase oil? Beats me. I think the milky oil is exhaust manifold related somehow since the plugs checked out and cylinder pressures are all high and even. Check your exhaust hoses (not fun) and manifolds in any case.

Yes, we were just cruising along at about 10 mph and then I decided to put the hammer down. The boat seamed sluggish but then took off. About 3 seconds later the rpms went down to like 500. If I tried to give it gas the engine would stall. The exhaust did sound different. I pulled all the plugs and they all seamed to look the same a little oily but not water. A compression test ranged 150 to 140 on all cylinders.

Like Peter said do a little more investigating before you replace the motor it could be as simple as gaskets. you need to dig a little more.

I have a 78 Ford 351 that got hot but I shut it off when I noticed it. I pulled out the thermostat that was not working and the engine seemed to run like normal and stayed at 140 degrees. Later we went for a ride and the engine lost all power. It would run but only at a very low rpm. I checked the oil and it is now the dreaded milky white oil. Compression test on all cylinders yielded 150 to 140 psi. Question is, should I try a rebuild or is it more cost effective to by a crate long block or short block? Also what would be the best place to purchase a long block if that route is taken? Thanks!