I doubt if the oil would hurt anything if you drain the water off the bottom. Any water in the oil will evaporate and eventually go out the crankcase vent.
However, I don't think I would run it in my Cummins. It would just not be worth taking the risk, plus, with no positive crankcase ventilation, it may take longer for the water to be evacuated. I don't think I would think twice about running it in an older gasoline engine. For one thing, that engine would not be as valuable as the Cummins, plus it would most likely have a PCV system.
How much oil do you have that has water in it? I know there is always a need for oilcan oil, or oil to paint on something for rust protection, so you may be better off just using it up that way.
Blake