Smell the oil if it smells like gas it's just a fouled out motor. To me it looks like there's an excess of unburned 2 stroke oil in your engine not gear oil. I recently picked up a 6hp Johnson that was doing the same thing, probably from the previous owner using too rich a mix. All modern 2 stroke oil should be ran at 50:1. Check the leg oil level and check for milkiness if oil is coming out water is going in.
Better to be safe then sorry but that said it looks like excess 2 stroke oil built up in your engine coming out the exhaust. You can buy a spray (the name escapes me) and spray it into the intake while it's running to clean out the build up. It works great, or you can go for a looooong ride at full tilt and that could clean it up a bit to. Make sure you bring a couple of spare plugs with you.
Edit: have a look at the exhaust port and if it looks real sludgy thats your problem.