Sorry to say so, but my money is on the valve guides. This sounds like a worn out engine. I don't remember how many miles you said are on it, but mileage is not necessarily the right barometer. Do you know anything about how the engine has been driven and maintained?
Sorry to be the bearer of bad news, but I think it's valve job time. It would be interesting to do a compression check, then squirt in the cylinder before rechecking compression and see if the compression comes up, if it does, you might get by with a valve job which includes fresh guides.
'84 Euro 240D, 523K miles
'88 300E 5 Speed
'81 300D Daughter's Car
Over 800,000 miles in