It might just need a new head gasket. Pull the head and examine the gasket particularly in the area between the timing chain cavity and the #1 cylinder. Then check the roundness of the cylinder bores. If the bores are way out of round then there's a big decision to make. But you have other decisions to make at this point so don't think about rods and rebuilds just yet. Pull the head and start collecting facts.

Sixto
87 300SDL