Water heater sealing question

Butyl should be fine.

Your post reminds me of our old fiver - the manufacturer cut a square hole, but then filled it with a square WH with rounded corners. While the facia covered the entire hole, there wasn't sufficient contact at the 4 corners to create a seal. I found this out by removing the wrap-around seats & seat panels at the rear of the fiver while working on other projects, and found the floor was soft under the seats. Upon chasing that, I found the source was this manufacturing defect, which allowed rain/wash water into the unit which flooded the floor. Because the floor vinyl wasn't sealed at the floor/wall intersections, water soaked into the particleboard flooring over preceding 7ish years before I purchased it. I replaced stringers and the subfloor in the rear 1/4 of that unit, and installed new vinyl which curled up the walls by an inch or so to prevent something like that from happening in the future.
To fix the issue, I added corner blocks to the opening, then reinstalled the WH with a properly sealed facia/face plate. I used butyl tape, then sealed any small openings in the face plate with silicone.

Several years later, leak free, we traded the fiver in on our first class C.