Part III: Anthropology (Man) and Covenant Theology
Chapter 19 - Covenant Conditions
In a sense, the covenant of grace is absolutely unconditional.
In another sense, we must (1) believe, (2) obey, and (3) do good works to be covenant partakers. This must be, since there are two parties to the covenant. Obedience and works are not just signs that faith is present, but are necessary themselves (pg. 314-15; Hebrews 12:14). These three things do not merit our salvation, but are required for us to receive covenant blessing. For example, "Good works do not merit life but flow out of life" (313). The final judgment according to works is "meant demonstratively," though, as evidence of real faith (316). Many will profess faith, but their lives will show otherwise. Our reward will be "not of merit, but of grace" (Heidelberg Q.63).
The Lutherans disagreed with all this (312), but it isn't sympathetic to Rome's view.
It avoids meritorious works or justification by sacraments, and also avoids anti-nomianism.
This view is quickly labelled legalistic today, but by the same view Jesus' words would also be seen as legalistic, for saying the sheep and goats will be separated based on what they have done. The key to maintaining God's grace in this, is that He grants (gives to us) the faith, obedience and works that He requires.