You got it right. Bury the drum upright. Ad the 'intake' pipe down inside the drum so that it is just a couple of inches above the bottom of the drum. Add enough water to cover the opening by about 6" maximum. Add the exhaust pipe so that it is above ground about 6".

The exhaust enters the intake pipe. When the pressure gets just high enough it bubbles up thru the water, which cools and dampens the exhaust. It then exits thru the outtake pipe with little to no noise or smoke. If it starts to get a little noisy, simply add more water.

It can be improved by burying the drum about 15' from the generator and making sure that the entire exhaust pipe is also buried about 6".

Placing the generator in a small equipment shed will further lessen the sound.

There is another way to increase the sound absobing of the unit. BOth pipes are inserted into the drum and both openings are below the waterline. I'm not too clear on how far below the line they are.