Here is an update. I took the cylinders off, got them rehoned and reinstalled. Dialed in the idle and mixture. On flight testing I still have poor climb performance and cruise. I talked to local mechanics, Savvy Aviation, Lycoming, Airflow Performance, Hartzell and have run through various air and ground trouble shooting schemes.
I think I found the smoking gun! I performed a valve timing check in the Lycoming Trouble Shooting Guide (SSP-475) that basically says check if the cylinder #2 intake valve begins to open and the exhaust valve begins to close as cylinder #1 passes TDC on its compression stroke. The opening and closing on my engine occurred at about 23 deg before TDC.
I opened the accessory housing and found that the idler gear markings were correctly aligned to the cam and crank gears per Lycoming Overhaul Manual (p/n 60294-7) paragraph 7-101 and figure 2-8. Or so I thought. I was looking at the markings on the face of the double gear which turns out to be the magneto marking and some extraneous blemish. I found the actual cam/crank markings in the grove between the two gears. Once the proper marking are aligned the conditions of SSP-475 are satisfied.
Besides the oil in the cylinders, I was seeing climb and cruise numbers that could only be explained by reduced power. I also had low CHTs. In any condition of flight CHTs would not go above 350 deg F. Good right? Not so! In my mind the valve timing issue explains the cooler CHTs (exhaust valve opening well into the power stroke) and the oil in the cylinders (both valves closed while the piston is still pulling a vacuum at the end of the intake stroke).
In the coming weeks I will reassemble my engine and take it for a ride. I will let you know the outcome.