You need to understand that water is heavier than oil. You have pumped a mix of water and oil to every bearing in the engine. And as it sits the water settles and displaces any oil on the surface of the bearing surface and then the rust begins..
Well I think you have come to a decision making time for your project. You must realize that every bearing surface is pitted from rust and you need some new parts..
I hear ya, I probably would get some cheap masonite peg board and rough cut it then pull it down to the frames using the holes, to conform it to fit with small screws and make a template unless you can source a piece of cardboard..
That is the lifter valley IMHO... the water could have come from anywhere and was circulated with the oil and settled there.. you have a problem. And it could be an intake leak but don't exclude the other causes. There are many.
You could chuck an allen wrench into a drill motor and waller out the rotted wood if it's not too far back in there then fill the void with epoxy filler. I have done this to a fitting on a cored deck and it worked well.
