Tecumseh H60 75526R Horizontal Shaft - Oil spitting from Breather Hose

This engine runs a Lightning Wood Chipper - it's probably 25 years old. 
I got it running (more info. on that below), and after a few minutes at even half throttle, oil starts to drip at first and then begins to spit out the breather tube.
Engine History:
1. The thing hasn't run in who knows, maybe 15 years.  Belong to my mother in law and sat in her barn. When I got it, it wouldn't even think about turning over. 
2. I took the engine apart and removed chipmunk nests and all kinds of debris from the whole thing. 
3. Carb was dry and cracked, so I replaced with a brand new one. 
4. New air filter.
5. New gaskets for air filter, carb, head, breather box, and muffler.
6. New governor linkage cable (the old one was all bent out of shape and not working properly)
7. New throttle plate, the spring on the old one was loose, adding to the governor and throttle not working properly
8. New gas line.  
9. Drained gas and added fresh.
10. Drained old oil and replaced with 19oz of fresh 10W30, synthetic. 
11. New spark plug. 
12. Removed valve spring cover and cleaned the breather box.  Cleared debris from pin hole drains.  The one-way valve seems to be working fine, but I don't have anything to compare it too, so I'm not sure how tight it's meant to be.  I have not replaced the existing filter in the box.  
13. With throttle in wide open position, adjusted governor arm by pushing the governor joint clockwise as far as it would rotate, and then pushing the arm itself as far clockwise as it would rotate, and locked it down with the screw.  
14. The cylinder looks ok to me, a little black on the top, but don't see any scratches, holes, scars.  
15. The cylinder heads are black, but it looks like they are seating OK in the closed position.  No major scarring. 
 
The engine fires up first try just about every time now.  Sounds ok, but does seem to have a lot of vibration - but again I have nothing to compare it to.  It's pretty loud.  It continues to run at half throttle just fine, but after a couple minutes I will see oil start to drip out of the breather tube, and shortle after that it starts to spit out pretty good, coating the grass.  That's when I shut it down.  
 
For trouble shooting:
1. Maybe it's overfilled with oil and it's frothing? The oil level when cold is right at the high fill mark.  Maybe I should put slightly less oil in so its more in the mid-range area? Maybe I should try regular 10W3 and not synthetic? Although my understanding is synthetic is supposed to be better about not foaming. 
2. Maybe there is an air-leak in the oil fill tube or somewhere else causing foaming? Although, when I check the oil after running it for a few minutes I don't see any bubbles on the dipstick. 
3. Maybe I just need to replace the breather box assembly too?  New, filter, new tube, new box and valve? 
4. Or maybe I should go straight to replace the valve seals because there is too much blowby getting past those seals? 
 
Should I try options 1, 2, and 3 first?  Or considering it's old and has been sitting in the barn for 15 years, should I go directly to the valve seals?  If I do that should I just put new valves in while I'm at it?  
 
Any other thoughts on things to trouble shoot first??

Thanks Roy.  Any resources you can point me to or a quick explanation of how to do a leakdown test? 

I'm sure I could find a shop to do a leakdown test.  Can you tell me why that test would help solve an oil problem?  Is it because if there is an air leak somewhere, that's whats causing the oil to froth and spew out the breather? 

I guess I'm getting confused by the difference between the 'rings' and 'valve stem seal'.  
 
I read some posts that indicated that a missing o-ring in the oil dipstick cap was causing there to be an air leak in the tube, causing excess frothing.  I checked my dipstick, and there is no o-ring there.  Should I get one and see if that helps? 
 
If the engine runs but with blow by, what if I place the breather tube in a large bottle to collect the oil so that it doesn't spray all over the ground?  I wouldn't want to the engine to seize, but could I in theory continue to run the engine to get some chipping down while collecting the oil? Bad idea? 

So, I have a fairly solid knowledge of how this engine works, but I'm still learning a little bit as I go.  
 
Am I correct in thinking that it's the cylinder moving up and down that grabs some oil from the pan and splashes it up to lubricate the sides of the cylinder wall to prevent friction?  And that the seal on the cylinder that is supposed to fit snugly against the wall of the bore is maybe cracked or worn, so oil is moving passed the cylinder head and escaping passed both the intake and exhaust valves every time they open and into the valve spring box and eventually out the breather tube? 
 
Or is oil coming up from the bottom of the pan directly into the valve spring box? 
 
If the first is true, then I should be looking at removing the cylinder and replacing the seal?  And that changing the valves wouldn't necessarily doing anything for me? 
 
I guess the bigger picture I'm trying to better understand is, how exactly does the oil system work in this engine, and what path is the oil taking in order to start in the pan and end up coming out the breather hose? 

My goal is to replace the piston rings and hope that solves the oil blow by that is shooting out of the breather hose.  
 
I broke down the engine but now I'm stuck.  I need to separate the crank case cover so I can get to the piston.  However, this engine was mounted to a wood chipper and I can't figure out how to remove the belt wheel so that I can slide off the crank case.  
 
On one side of the shaft was the fly wheel, which I was able to remove.  But the other end of the shaft has this pulley that drives the belt on the chipper.  I removed two set screws that looked to be holding it on, but it won't budge.  Not sure if I'm not supposed to remove it at all, or if it's rusted on.  I don't know how else to get the engine separated if I can't remove this piece.  
 
Photos below.  
 
 

Since he had the clearance, a bearing separator and puller would had been a better choice. This because pulling on the stamped v-pulley would just destroy it where a separator/puller setup would pull against the main hub.
 
A separator like the HFT set below or a larger with an appropriate puller. Just depends on the diameter of the pulley.
 
https://www.harborfreight...-puller-set-62593.html
 
Either way he would need ACE/OX torch to heat the pulley hub so it will slip off.