KZ750E involuntary engine service - advice needed

Hello everyone,
With the season beginning I had to notice a significant oil leak on my '81 KZ750E at the lower end of the cylinder left side (see attached). At first occurrence I cleaned it all off but after the next 30 minutes trip I had oil sprinkled all over my left shoe and the alternator cover was soaked. Looks like a bigger repair (might be an o-ring that is leaking here?).
This bike has around 100.000+ km (~62.000 miles) and legend has it that the engine was serviced once before through a previous owner but that must have been 20 years ago. It's running great so apart from the leakage there are no other noticeable problems when riding it. I've done many other repairs on this bike before like fixing ignition issues, thread repair, carb cleaning and synchronizing, etc. Though I haven't done a service like this, yet which is why I'm looking forward to your advice.
Since the engine has such a high milage I'd like to use this opportunity to do some additional maintenance tasks while at it. I gained some broad knowledge from watching and sometimes helping my father (from whom I got this bike) fixing mopeds and bikes in his garage so I'm willing to do this on my own. I'd like to setup a plan of things to do and what materials to gather for this maintenance. Therefore I'm looking for some guidance and recommendations as of what you'd put on that list. My aim is not missing the entire season. :')

I have the manual available and pretty much all necessary generic tools. 

My current draft of a plan is:
- The engine ideally remains in the frame throughout the entire maintenance. My space is limited so taking apart the entire engine might exceed my limits.
- Swap all gaskets (valve cover, head, bottom)
- Measure valve clearance and correct it accordingly with new shims
- Swap piston rings

Obviously I haven't seend the inside of the engine yet but do you have any other recommendations for maintenance tasks generically to do while the head is off?

For gaskets and other materials are there vendors you can recommend? I'm located in Germany, so European sources might be preferred cost wise.

Are there any special tools I need to acquire prior this job?

I might be using this thread as journal once I get this going.

Thanks a lot in advance!
Kevin

I would suggest not ordering any parts until you have it apart and measure up (if re-bore required then will need oversize pistons/rings and possibly a different head-gasket depending on the new bore size) good luck, should be relatively straightforward 

In addition to what's been mentioned, I'd send out the head for a valve job, and new valve stem seals.  

Thanks for your inputs! I'll be preparing a provisional workbench in my basement and start taking things apart soon. Unfortunately I don't have the tools to measure the pistons and cylinders so I'll probably hand that out to a shop as well as the head.

Before you take anything apart I would recommend a compression test.  It will give you some idea if you need to change rings.

Thanks, hardrockminer! I got myself a compression gauge. Due to the significant oil leak I'm not really able to ride it warm first so I did it with cold engine. Fuel disconnected, Throttle fully open I was able to run the test on cylinder 1, 2 & 4. On 3 unfortunately the thread repair insert came out along with the spark plug and I couldn't connect the gauge yet. I guess I take that "opportunity" to put a new insert it. On the tested cylinders I got 120 PSI (+-5). That still seems to be in the range of the manual, rather on the lower end though. I read somewhere here that you could spill some drops of oil into the chamber as a sealant between rings and cylinder to check if loss comes from the rings or the valves. I'll give that a try.

The correct method is to test with the engine warm and oil fully circulating.  Pull all the plugs.  Open the throttle wide open and check each cylinder.

A cold test will produce lower results so it sound like your rings are alright.  You don't need to ride the bike to get the engine warm.  Just start it and run it for a couple of minutes.

Compression looks OK but since you need to strip to rectify the oil leak (and worn "oil rings" won't effect compression) I would suggest checking measurements against spec. If within "wear limits" it may still be prudent to "hone" cylinders and replace rings while it's apart (preventative maintenance)

 A couple of days have past and I got a bit further.
- Removed head
- Cleaned the chamber with oven spray and brass brush
- Took out valves
- Removed cylinder
- Removed all pistons

In one picture you can see the source of the oil leak. The o-ring is flat and a piece of the gasket also teared off. I added some further pictures of the camshafts, valves, cylinders, head and pistons.

Prior the disassembly I briefly checked the valves for clearance. All intake valves seem to have some clearance but at least 2 exhaust valves didn't seem to have clearance anymore. I haven't taken any further measurements yet as I'm partially still waiting on tools. I'd like to ask for your experienced eyes though if they find anything obvious I'm missing that is beyond usual wear.
The camshaft looks ok for me. Nothing you can feel with a fingernail on the cams. Piston sleeves look all pretty much the same. No vertical groove you can feel with a fingernail. I guess the pistons seem to have some blow-by though?
The valve seats, especially on exhaust side, have some black deposits but are generally even (nothing you really feel with a fingernail). If guides are in spec would they be need to be re-cut or just lapped?
How do you clean deposits off of the stem-side of the valve? I didn't want touch it with any brush yet without making sure to not unnecessarily scratch it.

Thanks a lot in advance!
Kevin
 

Everything looks, more or less, normal.  Of course, we can't measure clearance and so forth from a photo, but I'd say you can, likely, get away with a garage rebuild, devoid of expensive machine shop fees.

My opinion, continue with the part clean up.  Carb cleaner dip helps loosen up baked carbon, such as on the pistons and valves.  Remove the rings, and replace them.  Soak pistons, removing carbon, particularly in the ring grooves.  A broken ring works good as a ring groove scraping tool.  Just be sure to not gouge out the aluminum in the ring lands.  Replace all gaskets and piston pin clips (the side that you remove to remove the pin).  

OEM gaskets are best.  NEVER buy green Athena brand gaskets.  Some people want a "gasket kit", but these are often like china "carb kits"; = PURE JUNK.  Fork out for OEM parts, and check ebay if the part is discontinued.  Just don't buy any gaskets that look like they are 20 years old, if you can tell, because they deteriorate with time.

Oh, and you will need a dingoball hone.  240 grit works well.  It's a little rough, but that's just what you need with an old cylinder.

Hi Nessim,
Thanks for all your wisdom, much appreciated!
In the meantime I was able to take some measurements and it seems I‘m lucky (so far). Valve stems, guides and piston diameters still seem to be within spec according to the manual. Some dimensions might rather tend to the lower end but so far I‘ll keep it as is. Checking the sleeves is still on the list though. 
I‘ll take the next days to get everything clean. Carb cleaner is something I have sitting on the shelf somewhere.

Thanks for the unmistakable warning on Athena gaskets! In the back of my mind I remembered reading about green gaskets somewhere on here. I don’t want to take apart things twice this season…

I‘ll have a look at your recommendation regarding honing. I haven’t done this before but it doesn’t appear to be rocket science. 

Thanks!