I am betting you have a burnt or chipped valve....I have seen a few on M54's...although that usually results in zero compression.

Oil gets in through the CCV over time and eventually burns up the exhaust valve. At least that is the theory...

Regardless, if it is something in the cylinder head, I would slap a good used head on there and put it back in service. The M54-equipped E53 X5 takes a cylinder head or head gasket pretty well. The car stays on its wheels the whole time, and you have good access.

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'99 E39 528i 5-speed 130k
'06 325Cic auto 115k
'05 X5 3.0 auto 173k-SOLD
'03 530i - manual swapped - 430k miles-SOLD