My father is dealing with this problem right now in his 87 300SDL(603.960). It started smoking like a battleship, we checked the turbo, when we pulled the turbo thinking that was the problem, we found oil was entering the turbo from the exhaust side. We then seperated the exhaust manifold from the head and found that oil was coming from #2 cylinder. Turned out to be a blown valve seal(exhaust valve). At 247,000 miles he decided to have a full valve job done, and is putting it back together right now.

My dad is a retired aircraft mechanic, and I've been wrenching for over 35 years myself, niether of us has ever seen an engine run while pumping that much oil through the combustion system. Other than smoking the car ran fine, only slightly down on power. Hope that helps. I do have a question I'd like to add about replacement timing chains, but I think I'll start a new thread, if anyone reading this has experience with replacement chains I'd appreciate your input.