Glad it was just the filter being poorly installed. To deal with the water contamination, I would do a short cycle change of the fluid with something inexpensive like Tractor Supply Premium hydraulic / transmission fluid. Run it for a couple of hours, then drain again and add the fluid of your choice. You're also going to need another set of filters, or maybe when drained the first time remove and drain the filters then reuse them for the short cycle.
REALLY glad that the oil wasn't leaking from that welded area!